Tian Yang, head of research at Variant Perception, recently joined FS Insider to discuss market unknowns and how they could impact recovery. He also explained additional key unknowns to keep in mind outside of the coronavirus like the ongoing U.S. - China trade war. See below for excerpts from his interview with FS Insider.
Can you give listeners an update on your outlook?
I don't think any of us could have imagined the scale of the massive lockdowns that were induced. In some ways, the magnitude of the market moves has also surprised us and probably a lot of people. Obviously, jumping forward to today, the big concern is that it's pretty rare in history to have a policy of inducing a global recession. Turning off the economy—just pulling the plug—it's not something we've seen before, so it's somewhat uncertain how exactly we emerge from here.
We've seen a lot of very well-known investors who have a wide range of views on what’s happening. In the past few days, you have guys like Stanley Druckenmiller and David Tepper coming out and talking about the terrible risk-reward in equity markets. At the same time, there are people at Howard Marks talking about just the extreme uncertainty in the market and the guys like Bill Miller talking about how things might not be as overvalued. He sees some great buying opportunities.Stay ahead of the news! Subscribe to our premium weekday podcast
I think that the breadth of views really speaks to just how uncertain the environment is. You know, this is probably not the time to be a hero and massively bet on just one single outcome. Overall, it probably does make sense to reduce risk and then try to be more pragmatic going back to the kind of barbell view in terms of how the world plays out.
Obviously, the key of what's happened since (the market bottom) is we're currently seeing this big divergence between equity markets and asset prices versus some of the economic data that's coming in. The reason being everyone knows the Fed’s balance sheet is up two and a half trillion dollars in just a few weeks. And obviously, it's set to keep going.
Right now, the outlook about how we address this collision between extremely strong liquidity versus the fact that the economy has seen the steep shock and usually after deep shock things sometimes tend to recover very, very fast. Against this, I think the initial wave back is where we've kind of bounced back from that peak fear moment. And from here, it does look like the market probably needs to just go sideways and struggle for direction until there's some clear evidence that the economy is really turning around...
But in terms of looking at the median stocks, average stocks, and even looking at equal weights in the S&P, a lot of these are still down 20-plus percent on average. A lot are down even more. There are still pockets where asset prices have cracked below, they’ve not bounced a lot and where potentially there’s still value to pick up. Those are the areas where, if you go for a traditional checklist, there are more things in place. Things like Fed easing liquidity, backstop is good, valuation is reasonable. Although the leading economic indicators are not quite all lined up, we're starting to see the very first signs that some things might be improving. For example, consumer expectations have been picking up relative to current conditions so there are a few signs starting to peak out.
There are still a lot of unknowns when it comes to the coronavirus, especially if we see widespread lockdowns again. It’s these unknowns that dictate the outcome of this recovery.
Yeah and obviously, I'm not expert in the area, but something worth mentioning is that typically markets really dislike unknown unknowns. And that means uncertainty in the sense that they can't even put parameters around it. If we could go back to March when all these lockdowns started coming in, I think the issue for policy makers, investors and financial market bulls was that this was an unknown unknown and nobody knew the scope of it. So, then you end up with very drastic policy actions and asset prices.
I think by now, this is probably more of a known unknown. So, it's possible to potentially parameterize what it's going to look like, and the scope of it. I think the evidence is that this is somewhat more deadly than the common flu overall. The mortality rate is higher, but it also disproportionately affects older, more vulnerable populations.
It's possible to put these parameters around it. So that's potentially why, even if we get second wave, financial assets and the market is probably not going to be as reactive to it. I think the issue is we don’t know if there are other unknown unknowns from it. That does worry me.
We have the U.S.- China trade war that 18 months ago was a big deal. Now, no one cares. I remember on the day when a lot of these new sanctions against Huawei were announced, I looked at the most read pages on Bloomberg and the sanctions weren’t even on the front page. The top stories were all about COVID-19.
Some of these things are potentially more in the camp of unknown unknowns, it's hard to even parameterize how deep it goes, especially when both China and the U.S. are in somewhat precarious political positions.
There’s a lot of internal dissent with how policy has played out as a result of COVID-19. President Trump obviously wants to win his reelection. And with some of the things coming out, it does feel like it's going toward a lot of red lines. Taiwan is a big red line for China and the U.S. is pushing there. You know, some of the sanctions are really going to hurt this time around. It does feel like the past 18 months were spent in a fruitful way by the Trump administration. They were actually figuring out how to hurt Huawei and hurt China properly through sanctions and not in a blanket way.
I think it's more for the sake of some of these things that actually need to get discounted. Again, especially if we think about technologies being such a leadership group, and semiconductors, and Alibaba and all these companies are probably somewhat exposed to these kinds of risks. And we don't know, and maybe it passes, but it's probably something that people need to go back to and price.
With the virus, as long as it’s a known unknown, the damage is probably going to be contained to a lot of the sectors more directly affected. If you can look at things that are going to survive with liquidity that's not as directly impacted, those companies will probably actually end up doing okay.
To listen to our full-length interview with Variant Perception's Tian Yang click here. If you're not already a subscriber to our FS Insider podcast where we interview book authors, strategists and industry experts from across the globe on all things economics, finance and markets...