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Between the coronavirus, trade war and more, financial markets have had an extraordinary six months. What’s next?
- The year has so far been one where narrative finance, rather than a command of economic or financial fundamentals, has guided asset prices
- There is no reason the third quarter should be as extraordinary as the first two, but it would take a brave investor to bet on it being uneventful
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The investor’s world is never a quiet one. Uncertainty reigns supreme, which makes the financial markets so interesting. The Hong Kong market peaked just as we went into the Lunar New Year holiday and it seems like we’ve never come out. The past six months have been the most extraordinary in my 40-plus years in the business. What do the next six months have in store?
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We began the year by saying 2019 was spectacular for investors and that the markets would find an excuse to slow down. No one expected the dominant financial narrative for 2020 to be the coronavirus.
The year has been one where narrative finance, rather than command of economic or financial fundamentals, has guided asset prices. This market narrative began with a little local difficulty in Wuhan, serious to Hongkongers trained on severe acute respiratory syndrome but which global investors thought would quickly die out.
After all, China destroyed its economic plans for 2020 by amazingly locking down its economy. That local narrative grew to a medium-sized story about the global supply chain slowing production in parts of Europe. One of Europe’s weakest economies, Italy, exploded into the consciousness with a medical crisis, but it still took a vital four weeks for investors to spread the now-globally contagious financial narrative.
Stock market investors capitulated on March 23 and the narrative mutated into one of recession, unemployment and deflation. Central banks and governments around the world injected a massive dose of liquidity into their economies, consisting of money printing, handouts, corporate subsidies, takeovers and job protection at any price. A separate narrative strain was the oil producer row that led to a day of negative oil prices.
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The main strain morphed into a financial narrative of overstimulation, loose money, unsustainable sovereign debt levels, a collapsing economy and worsening China-US trade relations. These were ignored by investors, but each one is sure to lie dormant and infect economies in years to come. The market focused on the sub-narrative that free money will always be available and end up in the stock market.
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