FEAR AND EUPHORIA

Fear and euphoria are dominant forces and fear is a multiple of the size of euphoria.

Allan Greenspan

The financial results of public companies at a global level reflected in the second quarter of 2020 the impact of the pandemic on the real economy. However, in some capital markets, particularly in China and the United States, there seems to be a disproportionate optimism that is betting on a strong and rapid recovery and that seems to disregard a scenario of deeper negative impact.

Of the stock exchanges that we systematically monitor, five indices stand out with double-digit advances in the last twelve months: Nasdaq-USA (+ 41.7%), S&P500-USA (+ 18.7%), DAX-Germany (+ 12.3 %), Shenzen-China (+ 26.8%) and Nikkei-Japan (+ 14.1%). In contrast, the Mexican Stock Exchange advanced only 0.7% in that period, while Brazil’s IBOVESPA did so by 1.0% and Chile’s IPSA index has fallen -16.0%. In other words, there is high optimism for developed markets and very little enthusiasm for emerging markets.

In the case of the Mexican Stock Exchange, a quarter of divergence is also perceived: Companies in basic consumer sectors and with little massive contact with customers reported significant increases in their income, while those in the services sector characterized by massive handling of clients saw their results greatly affected by the pandemic. Companies like Bimbo and Gruma posted increases in income of 20 and 25 percent respectively; growth in operating cash flow of 30 and 26 percent, as well as increases in net profit of 108 and 38 percent. On the opposite side, only two examples are enough: Alsea, operator of several restaurant chains, reported revenues that fell 65 percent compared to the previous year, as well as net losses of 2,578 million pesos, while retailer Liverpool accumulated a decrease in sales of 59 percent and reported net losses of 2,879 million pesos.

In the United States, the optimism that is perceived in the markets seems to be distancing itself more and more from reality. The S&P500 Index is about to hit all-time highs again, after a nearly 50% rally from its lowest point reached on March 23, 2020. Never in history has a stock market in the United States rallied so quickly from a correction as strong as the one we saw in March. The excitement of the markets stands in stark contrast to the millions of American citizens who have lost their jobs and the more than 160,000 who have lost their lives in the pandemic. Something does not sound logical and reminds us very much of the 1999-2000 period when it seemed that there was nothing that could stop the rise of the capital markets. We all know how that episode ended.

Apple is about to become the first company to reach a valuation of two trillion dollars, which is at least 50% higher than the GDP of the entire economy of a country like Mexico. In terms of valuation, the S&P500 today trades with an average multiple of 30 times, which represents the highest multiple since 2009. We begin to see cases such as Tesla, a company that trades with a multiple of 953 times and is reaching a market capitalization five times that of GM and Ford combined. In summary, at this time it seems difficult to justify the optimism of financial markets in developed countries, and that optimism could very soon turn into fear as the devastating effects of the pandemic begin to be more clearly assessed in some companies and in some industries. We should remember that in 2008 it only took one “Lehman Brothers” to go from fear to panic in one weekend and to sink the entire global economy into the Great Recession.