Corporate giants are propping up the stock market as “central bank liquidity pumps” the performance of larger companies, says veteran investor Mark Mobius. He said that’s making equity plunges unlikely, despite the economic toll of the virus.
Mobius, who left Franklin Templeton after more than 30 years in 2018 to set up Mobius Capital Partners, told Financial News that the Federal Reserve and other central-bank efforts to prop up markets during the crisis may be masking the deterioration of many small- and medium-sized businesses. The S&P 500 has soared about 32% from a low on 23 March.
Looking at “the components of any major index”, Mobius said, “you will see they are make up of large company stocks. In this crisis those large companies are more likely to benefit from government help and particularly from central bank liquidity pumps so their performance will be better than a plethora of small and medium companies many of whom will go bust. But they will not be noticed by the index.”
Advisers and analysts have said they’ve been flooded with client calls asking the same question: Why are stocks rallying amid sign after sign that the economy is getting worse? In a Bank of America fund manager survey, 68% of respondents said that we are in a bear market rally — or short-term spurts of gains in stocks during a period of longer-term decline.
According to analysis of 11 markets around the world carried out by Mobius Capital Partners, since 1987 the average bear-market fall has been “about 50%”.
In the UK, for example, Mobius said the more than 30% drop in the benchmark FTSE 100 during the February and March market sell-off was “rather mild” compared to previous bear-market falls. The FTSE index has since recovered around 20% of those losses.
“A 32% fall would give us pause to think that perhaps this is now the end,” said Mobius. “Relapses are always expected when markets are pulling out of a dramatic bear market as we have seen.”
Despite government efforts to stop the bleeding, the pandemic has led to the collapse of several notable companies in the UK. Restaurant chain Carluccio’s and fashion retailers Debenhams, Oasis and Warehouse have entered administration over the past few months.
“The very rapid and enormous effort by central banks and multilateral banks to pump liquidity into the global economic system is alleviating a lot of the concerns regarding the viability of companies and economies going forward,” he said. “Therefore, a lot has been discounted, and investors are beginning to think that this is probably a good time to start accumulating stocks.”
While Mobius correctly called the bull market in 2009, he has made some wrong-way predictions. In 2018, he told Financial News that US stocks would fall 30%. They have rallied to records in the two years since — even with the virus-induced selloffs, the S&P 500 has still gained about 10% since the time of that interview.
During the pandemic, Mobius has said he has been bargain hunting for undervalued companies. At the end of a rocky month in markets spurred by the spread of the virus, Mobius in late March told FN that he was piling into pharma and luxury stocks such as France’s LVMH.
“Of course those lows could re-occur, but the chances of doing so are not significant,” he said this week. “If we assume that my fairly optimistic outlook is incorrect, then we could go right back to where we were at the recent bottom, and perhaps even lower.”
This article originally appeared on Financial News.
