“It’s very hard to get a grasp of what the fundamental rationale is for this rally that we’ve seen and the valuations of markets at present,” said David Sokulsky, CEO and chief investment officer of Concentrated Leaders Fund.
Sokulsky on Wednesday told CNBC’s “Capital Connection” that economic and corporate fundamentals are “nowhere near as good as what the equity markets are pricing in.”
Jonathan Sheridan, chief investment strategist at Australian investment company Fiig, echoed that sentiment. Given the underlying economic data, the “huge risk-on tone” in markets “puzzles me,” he said, adding that he doesn’t see “any reason” for the recent rallies.
A trader walks in front of the New York Stock Exchange on May 26, 2020 at Wall Street in New York City.
Johannes Eisele | AFP | Getty Images
Sokulsky said the market is “purely driven by speculation and … excess liquidity in the system.” Central banks and governments around the world have announced fiscal and monetary in various packages to support their economies, which have been thrown into crisis by the virus.
“How institutional investors, fund managers and the rest of the participants react to that excess liquidity is just unknown,” Sokulsky said. “At the moment we’re just seeing markets on a runaway tear, which is creating as close to a bubble-like environment as we’ve seen since 2000.”
He also pointed out that markets are not behaving the way they used to in the past.
Noting that there hasn’t been market volatility in response to Beijing’s plan for a national security law in Hong Kong, he said: “If this happened a year ago, markets would have been down 10% to 15% on this news.”
“This is why I say it’s a dangerous environment, because at the moment, the markets are not … responding to any of the macro risks that are out there. They’re not responding as they would have a year ago.”
Instead, market movements are “momentum-driven” and based on liquidity from central banks, said Sokulsky.
“It seems like the fundamentals and the risks actually just don’t matter,” he added. “All that matters is liquidity and momentum and, you know, that doesn’t last forever.”
Fiig’s Sheridan looked ahead to possible insolvencies, a problem that central bank liquidity won’t be able to solve.
“The reality of all those job lost and all that contraction in the economy is going to mean significant bankruptcies and a significant curtailment in economic activity,” he said. “I don’t think you can escape that.”
Sheridan recommended that investors improve the quality of their portfolios to prepare for the challenges ahead, and said he sees the rally in U.S. Treasury yields continuing throughout the year.
“Even if we do get a very quick recovery, the damage to the economy is going to be significantly greater than is priced in at the moment,” he said. “That’s why I remain bullish on those longer-term Treasury yields.”