Equity and credit markets can retest recent lows, warns Chris Wood

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a 'bull phase', typically defined as a rise of 20 per cent or more from the recent lows.

Equity and credit markets can go back to their recent lows, and probably slip even further if the infections caused by the coronavirus (Covid-19) pandemic do not peak out by April-end, wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

“In the unlikely case where infection rates do not peak out by the end of April, stock markets and credit markets will re-test recent lows and worse. At that point, there will be growing pressure for people to return to work because at a certain point the negative impact on the economy and people’s general livelihood becomes a bigger negative than the disease itself,” Wood said.

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a ‘bull phase’, typically defined as a rise of 20 per cent or more from the recent lows. The US, South Korea, Philippines and Indonesia have already entered technical bull markets, having risen over 20 per cent from their respective low levels. Indian benchmarks – the S&P BSE Sensex and the Nifty 50 – are also flirting with this territory now.

With most countries in a lockdown mode given how quickly Covid-19 has spread, Wood believes it will be tough to extend the lockdown phase beyond this quarter given the high debt levels. This, he says, is even more the case in the developing world than the developed since safety nets are not the same in the case of former to support the unemployed.

“It is hard to see the Western world locking itself down into another Great Depression. But that threat is real if the lockdowns are extended beyond this quarter because of the sheer level of outstanding debt. In this respect, it is hard to imagine that the three-week lockdown in activity ordered by Indian Prime Minister Narendra Modi on March 24 can be extended. That is assuming such a lockdown can even be implemented effectively in such a densely populated country,” Wood wrote.