Covid-19 continues to wreak havoc worldwide, with virtually no area of economic and social activity left unscathed. However, the likelihood of a worst-case cataclysmic scenario is rapidly diminishing, and if there is a “second wave”, governments are unlikely to reimpose harsh lockdowns given the challenges of severe financial cost, public acquiescence and effectiveness.
If a government and its policy are perceived as having managed the crisis well, their markets reflect this perception. Examples of this include China, Japan, South Korea, Australia, New Zealand, Germany and Canada. The reverse is also true, and the FTSE all-share index was down 17.4% at the end of the second quarter.
If the market is right about the normalisation of earnings in 2021, there really isn’t a disconnect. However, if the global economy falls into a deep recession, the decline in profit margins and profits will affect the market severely. The next few months are critical. While technology stocks have done well and are much more expensive than other shares, they deserve to be. Now, the ratio of the IT sector to the S&P 500, which represents the broader market, is about 1.7, whereas in theera it rose to 2.2. While there may be individual technology stocks that are overvalued, as a group their valuations are not unreasonable, particularly given their prospects.
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