BNY Mellon IM chief economist: Post sell-off market moves are not 'artificial'
Recovery will be determined by outlook for coronavirus spread
Concerns that asset valuations are out of touch with economic reality are misplaced, with global fiscal and monetary stimulus more than keeping pace with the pandemic-induced hit to GDP, according to chief economist at BNY Mellon Investment Management Shamik Dhar.
However, Dhar warned investors should prepare portfolios for greater volatility in the months ahead while the outlook for the health crisis and the infection rate itself is set to be the biggest influence on the nature of the global economic recovery.
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Speaking to Investment Week, the former chief economist in the UK's Foreign and Commonwealth Office said that while the rebound in asset prices since March lows have been described as "artificial" by some, the evidence suggests otherwise.
He explained that while the global economy shrunk by 8% to 10% in the second quarter of 2020, amounting to around $8trn, fiscal and monetary stimulus amounts to "north of 11% of global GDP in terms of fiscal measures, roughly equally split between traditional fiscal stimulus and income support or loan measures".
Dhar added: "There is another 8% of global GDP in quantitative easing. So just those two things together more than compensates for the output loss we have seen in Q2."
In addition, Dhar noted that "any asset is priced by two things"; future income on assets and discount rate.
He said: "If you look at future incomes, whether that's equities or credit, it strikes me that actually markets have broadly speaking priced in a reasonably optimistic, relatively quick bounce back in terms of earnings, or defaults bankruptcies in the case of credit, but not ridiculously so.
"If you look at the discount rate, bond yields have fallen by over 100 basis points, which would tend to increase the valuation of risk assets quite dramatically. That is a fundamental move, not a not an artificial one."
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Dhar said the market outlook sees risk assets "making reasonable progress, but with big downside risks", and investors should be "moving back into the market gradually, probably at lower levels of risk in your portfolio than you normally run" while making use of hedges and a "reasonable" allocation to fixed income.
He added: "It is clear that what kind of recovery we get will primarily be determined by the disease.
"If we can avoid a major second wave, or at least one that does not overwhelm health services, then we are looking at a V-shaped recovery. If there is a second wave, then a W-shaped and other recoveries come back into play."
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