According to analysts at the National Bank of Canada equities are not cheap, but they point out valuations remain supported by unprecedented monetary stimulus. They warn about a second Covid-19 wave and the consequences of mass protests around the globe.
Key Quotes:
“We continue to recommend market-weighting of equities and underweighting of fixed income, with extra cash available for deployment. While we recognize the importance of the central banks’ support of equity markets, we are wary of unintended consequences of the mass protests held around the world in recent weeks. In the 1918-19 flu pandemic, a second wave of infection occurred after large social gatherings were held in a number of cities to celebrate the end of World War I.”
“The coming of a second wave of Covid-19 as soon as this summer would brake the economic recovery and the earnings outlook. In the coming weeks it will be essential to monitor the pandemic curves for any resurgence of Covid-19 in large cities where demonstrations were held. In light of the recent protests, we think it prudent to redeploy a small portion of our large excess cash position to fixed income, enough to prune our underweight position by 3 percentage points.”
“We continue to recommend market-weighting of equities and underweighting of fixed income, with extra cash available for deployment. Equities are not cheap, but valuations remain supported by unprecedented monetary stimulus. And as argued in our most recent Monthly Fixed Income Monitor, “the Federal Reserve has yet to deploy the full might of the emergency lending facilities it rolled out amid the crisis. Indeed, of the eleven facilities announced up to now, only five are currently operational and their usage [is] quite limited. Corporate credit facilities, through which the Fed has committed to buy investment-grade and junk-rated corporate bonds on the primary and secondary markets, is a case in point. These facilities have been capped at $750 billion, but the total uptake so far is a mere 5% of this amount. Other programs are similarly underused, leaving the Fed with a ton of dry powder.”
Share
