Quite a few rub their eyes in amazement these days. Germany is plunged into an unprecedented recession as a result of the corona pandemic. According to estimates by the International Monetary Fund (IMF), there is a worldwide threat of the greatest economic downturn since the global economic crisis 90 years ago.
But share prices are at a level that is almost 30 percent above the low of March 19, when it was clear that economic activity in Germany would come to a complete standstill for at least weeks. With a good 10,800 points, the German share index Dax on Wednesday was still a good 20 percent lower than the record high of 13,795 points on February 17. But after the index tumbled 40 percent by March 19, investors and experts feared another dramatic crash.
Surprisingly, this did not happen – on the contrary. Main reason: The unprecedented, historically unique government rescue packages, and that in the trillions worldwide. To this end, the central banks have provided the economy and banks with liquidity like never before. The European Central Bank (ECB), for example, initially increased the volume of its bond purchases by EUR 120 billion and added a further EUR 750 billion shortly thereafter. “So there is plenty of liquidity for a long time,” says Olivier Berranger of the fund company La Financière de l’Échiquier.
Computers fuel crash – and upswing
In addition, private investors in particular have shown no panic. “Our customers reacted very prudently,” says Ralf Lochmüller, head of the fund company Lupus Alpha. Martin Lück from the Blackrock asset manager speaks of rational behavior.
The dramatic downturn in March was apparently driven by professional investors. Much of the trading is done through computer programs that automatically sell stocks at certain thresholds. Conversely, they had to get back in afterwards when the prices moved up.
But what’s next? The range of forecasts is large, a clear sign of the high level of uncertainty. Hardly any experts expect a new crash. On the other hand, Lochmüller says: “We do not know whether it was now on the stock exchanges.” Lück does not rule out that the Dax will be lower in one year than it is currently. But one thing is certain: investors have to be prepared for significant swings up and down.
Sometimes the Dax increases by five percent, then it loses again on a similar scale. For DZ Bank, it is clear that the stock market barometer will probably not reach the level from before the crisis again until early 2024, i.e. in just under four years. “Price setbacks are as much a part of the stock market as the scoreboard in the stock market – but also the subsequent recovery,” says Ulrich Kater, DekaBank chief economist.
Recession is inevitable
The stress factors remain high for now. A dramatic recession is inevitable, world trade is shrinking, unemployment is rising. Corporate profits will plummet. The reports for the first quarter were and are harbingers. However, they only partially show the effects of the corona pandemic, after all business was still going well in January and February.
Only in the second quarter of the year will the crisis hit companies fully. In turn, companies cancel the dividends that have already been promised. DZ Bank speaks of cuts of EUR 100 billion in Europe. They could shrink by a total of 40 percent. The massive drop in oil prices is making energy costs cheaper for companies and for consumers, heating oil and petrol at petrol stations. But this is above all an indication of the drama of the crisis. When there is an abundance of oil, it shows how badly the economy is doing.
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Nevertheless, there are some indications that the stock market could slowly start to pick up again. The first easing measures are registered, especially the development in China. The financial markets are generally looking to the future. Economists expect the crisis to subside in the second half of the year and a significant recovery with clear growth rates in 2021.
In general, however, a question is of paramount importance for traders and investors as well as for business, consumers and society in general: How can the corona pandemic be overcome, when are effective medicines available, when is a vaccine in particular?
Interest will not come back
Regardless, stocks remain in focus for several reasons. “Interest rates have disappeared,” says economist Kater. “Because of the corona crisis even more than before.” This means that monetary policy must keep interest rates low. “Hoping for interest to return to the savings books is therefore unrealistic.”
Other economists do not expect the ECB to raise interest rates for years to come. Bonds are also unattractive in terms of interest rates: the yield on federal bonds is clearly negative. The situation is similar with French government bonds. US government bonds currently only bring about 0.6 percent.
Despite the crisis, there is a lot of money in circulation looking for investment opportunities. Many investors have solid stocks in view. That supports the courses. In any case, there are other sectors besides the health and medical sectors that also benefit from the crisis.
“Inflation not likely to rise”
A lot of liquidity in the economy and financial markets actually point to rising inflation, which in turn would speak against stocks. But you can’t see that far and wide either. In many industrialized countries, inflation expectations are at the lowest level ever measured – because of the central banks and also because of the dramatically falling oil price. Consumers are more likely to hold back after the crisis, adds Markus Demary from the Institute of German Business. “Overall, inflation is not likely to rise.” Corona could even lead to deflation.
Even if the gold price has increased significantly in the past few weeks because the precious metal is considered a “safe haven”: experts do not see it as a real investment alternative. Precious metal prices could follow the development of the oil price and the poor development of the social product, says Youn-Cong Choi from precious metal company Heraeus.
It is not excluded that the large investment money leads to undesirable developments. “Given the almost non-existent risk of inflation, liquidity could be significantly increased. However, this harbors the risk of bubbles forming on the markets, ”says investment strategist Berranger. Other observers do not see that. The recovery on the stock markets is fragile, emphasizes Dave Lafferty from Natixis Investment. He does not see that the “historically most violent blow to the global economy” is digested after just a few weeks. “Market participants continue to underestimate how long and how violent the effects of the global shutdown will be.”
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