“Best of luck”: ARP CIO Jensen warns of “short attention span” amid stock market rally

Boom and bust

The recent equity market rally is unlikely to stave off the “devastating” economic impact of Covid-19 this year, according to Absolute Return Partners’ founder and CIO Niels Clemen Jensen.

Stock markets have recovered on the back of government and central bank support, with the S&P500 rebounding some 31 per cent in recent days having lost a third of its value in last month’s coronavirus-driven collapse.

Equity long/short hedge funds are understood to have notched up solid numbers for April on the back of that rise.

But Jensen, whose institutional investment consultant and multi-manager fund provider runs the ARP Diversified Futures Fund and ARP Energy Fund, believes a “short attention span” among traders has resulted in “unusual” equity market behaviour.

“As soon as governments and central banks started to throw money after the patient, equities started to rally and have rallied pretty much ever since in total disregard to the economic implications of Covid-19, which will soon be felt,” he observed in his monthly market commentary.

He pointed to research suggesting GDP will fall by some 20 per cent in Q2 this year, compared to the same three-month period in 2019, and stressed that with the global economy “in meltdown virtually overnight”, trendline methodology based on previous quarters’ performance is “meaningless.”

Man FRM, Man Group’s multi-manager unit, said the recent stock market recovery was notable among equity long/short hedge fund managers who maintained market exposure during March’s sell-off, and ultimately benefited from the bounce.

But Jensen warned that the redundancies, reduced wages and furlough payments amid the lockdown will have squeezed consumers’ spending ability for at least a few months, adding: “I am struggling to see how investors can continue to ignore fundamentals.”

“The economic cycle may be V-shaped on the way into recession, but the exit is more likely to be U-shaped,” he added, describing the effects of the global pandemic as “the most dramatic economic setback ever”, and worse than the 1930s Great Depression.

“Do you really think rising equity markets can be justified in such circumstances? I am fully aware that the rally is driven by the Fed’s actions and nothing else but, as I see it, what began as a relief rally has turned into a Greater Fool rally.

“Increasingly, it reminds me of the latter stages of the Japanese equity rally in the late 1980s, and I can only wish you the best of luck if you are participating.”