The Corona Spread (Part 3)

Since the market low mid-March, we have seen a remarkable recovery of equity markets. While it is normal to see a rebound after such a sudden and heavy downward move, this rebound is extraordinary as we are in the middle of the worst global recession in nearly one hundred years. The power of ultra loose monetary policies coupled with super expansionary fiscal policies are leaving their mark on capital markets.

What has this done to our Corona spread (www.hanseatichunter.com/post/the-corona-spread-part-2) ? Have the political rescue packages helped to restore trust in cyclicals?

No! While our Corona Short-basket did bounce by 22%, it underperformed the market by over 5%. Meanwhile, our Long-basket experienced a phenomenal bounce of 41%, an outperformance of 14%. It is almost back to its February high, now with a +13% year-to-date return. This means our “Corona-Spread” is between the two baskets is now at 50% !!

A couple of conclusions can be drawn from these observations. First of all, the positive of effect of fiscal rescue packages combined with central banks flooding the market so far, clearly outweighs the negative effect of the deep recession. Time will tell if this can last. Secondly, it seems that confidence in the fiscal side of the rescue packages is not as strong. The market fears that cyclical stocks will face a longer recession and a potentially massive dilution (e.g. Lufthansa rescue package). Thirdly, confidence is high that changes of both consumer habits (e.g. online shopping, meal kits) and corporate management (e.g. home office, video conferencing) will result in a lasting structural transformation. How else can you justify that Zoom Video Communications trades at this year’s future estimated revenues of 46x and earnings of 1,100x.

But this is where the opportunity lies: knowing which overhyped stocks to short if it turns out to be just a temporary windfall versus buying the long-term winners. If you are more of a value investor, there are now plenty of opportunities of buying hard assets that will not go away, from Spanish hotels to cruise ships, from oil platforms to airports. The challenge here is to find the ones that survive and where the potential dilution is already largely discounted.

Either way, long/short investing is the way to go. Happy hunting!

The HanseaticHunter

#coronavirus #dax #performancegap #germanequities