Undeterred by the global trade slump from Covid-19, stock markets have remained generally buoyant since crashing in March, defying expectations and contrary to warnings on the state of the global economy.
A survey released by Bank of America Merrill Lynch (BoAML) however found that a record 78% of global fund managers believe the stock markets are ‘overvalued’. This is the highest reading since the survey began asking the question in 1998.
This inflated market confidence is believed to be based on the current low value of stocks, and an expected fast return to 'business as usual' as lockdown measures ease. The chances of a fast, V-shaped recovery however is a subject of great debate.
The United States Federal Reserve is itself very uncertain how the economic recovery will go. It has therefore factored in three possible outcomes in its annual bank stress tests. The results are to be issued on June 25th. They will see how banks perform against a rapid V-shaped recovery, a slower U-shaped recovery and a rough W-shaped recovery. With confirmed cases in the US rising in recent weeks however, the US is not expected to be returning to normal at any time soon.
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Chart showing the performance of the FTSE 100 in the past six months.
In the UK, Andrew Bailey, the Governor of the Bank of England was equally uncertain what shape any recovery might take. Speaking as the bank announced its new £100bn stimulus package, he said: “As partial lifting of the measures takes place, we see signs of some activity returning. We don’t want to get too carried away by this. Let’s be clear, we’re still living in very unusual times.”
Another factor in the unexpected Wall Street figures is believed to be a growing number of amateur investors and a certain amount of naivety on their part. To illustrate this, in the US, the online trading platform Robinhood has had more than 3 million new accounts created this year. The ease with which inexperienced new investors can now enter the market is causing a boom that could be artificially inflating the stock market.
Commenting on the many new amateur investors, chairman and chief executive of Omega Advisors, Leon Cooperman, told CNBC they, "are just doing stupid things." He went on to say, "The gambling casinos are closed and the [Federal Reserve] is promising you free money for the next two years, so let them speculate. From my experience, this kind of stuff will end in tears."
Noting the paradox of stock market confidence and global economic fears, many experienced investors are instead seeking a safe haven hedge for their portfolio, and gold has been one of the top choices.
Reuters has made a survey of nine private banks that serve the world's ultra-rich; it found they were all advising their clients to raise their holdings in gold bullion. All nine private banks believe the precious metal could reach its highest ever value. Consequently, some were recommending their clients allocate as much as 10% of their investment portfolio to gold.
Lisa Shalett, Chief Investment Officer of Wealth Management at Morgan Stanley told Reuters, “Our view is that the weight of monetary supply, expansion, is going to ultimately be debasing to the dollar, and the Fed commitments, which (are) anchoring real rates, make the case for gold pretty sturdy.”
Kiran Ganesh is Chief Investment Officer at UBS, the world’s biggest wealth management bank. He echoed Shalett's statement saying, “With the recent equity rally, people have become more nervous. People are actively seeking out portfolio hedges that might perform well in a range of scenarios.”
UBS further sees gold reaching $1,800 by year-end, however in the event of a second wave of coronavirus it predicts it could reach record high of $2,000. With the World Bank warning of the worst global recession since the Second World War, stock markets could be in for further losses in the months and years to come, and many of the world’s leading investment funds clearly feel that gold is the way to go to protect your wealth.
