Here comes the traditionally weak season of “Sell in May”. This May, the circumstances set the stage for a pullback: 1) more gloomy economic data and corporate earnings to be released; 2) no proven effective drugs and vaccines against COVID-19 yet; 3) stock markets just enjoyed record gains in Apr; 4) valuations no longer distressed, and U.S. equities even look expensive. Wait for better entry points to accumulate growth sectors and policy-supportive industries.
- No V-shaped economic rebound without virus immunity. We should not expect global economy will easily stage a V-shaped rebound until effective drugs and vaccines have been developed, but vaccines are generally believed to take at least 12-18 months to develop, test and approve for public use.
- Relaxing lockdown measures could be a double-edged sword. Without effective drugs and vaccines, easing lockdown measures inevitably run the risks of a second wave of outbreak. Germany, which was among the first to relax measures, has seen its infections and deaths trend upwards last week. As more countries are relaxing measures in phases, investors will keep a close eye on any rebound in infections.
- Economic data & corporate earnings worst to come. Most western countries started imposing lockdown measures since mid-March, and thus Apr’s data to be released in the coming weeks would reveal a fuller, and uglier picture. S&P 500 Q1 earnings have been disappointing so far, and more earnings cut are possible. In terms of valuations, S&P 500 seems quite expensive based on both 2020E and 2021E earnings. HSI is much cheaper, but shouldn't be immune from potential global market pullbacks.
- Risk aversion still high. The VIX, USD and gold remain at elevated levels, despite a strong rally in stock markets. US 10-year Treasury yield is even lower than the level on 25 Mar when S&P 500 troughed. All these suggest investors of other asset classes are not as optimistic as stock investors.
- US-China tension reignites. U.S. President Donald Trump threatened to impose new tariffs on China. With Trump seeking re-election in Nov 2020, expect more uncertainties on US-China relations. As investors begin to discount such risks, that could cap the upside in stock market, or worse, lead to further cut in forecasts of economic growth, corporate earnings and equity valuations.
- Strategy: Accumulate growth stocks on dip. At this point, we continue to like capital goods sector. Oher than that, suggest waiting for better entry points (HSI at 22,000-22,800) to accumulate growth sectors and industries expected to have strong recovery supported by policies. That includes internet, healthcare, education, auto, sportswear, brokerage.
