Real world is 'divorced from what’s happening in the S&P 500': Strategist

Kim Catechis, Martin Currie's Head of Investment Strategy, joins Yahoo Finance's Kristin Myers to discuss why the S&P 500 continues to climb year-to-date despite a rising number of global coronavirus cases.

Video Transcript

KRISTIN MYERS: We are joined now by Kim Catechis, Head of Investment Strategy at Martin Currie. Kim, thank you so much for joining us today.

I want to start with, you know, essentially what we've been seeing in the markets but also where we left off the last time you and I spoke. I mean, coronavirus cases at that point in time were up 3 million. They are now, as I just mentioned, up almost 5 million, and yet the S&P 500 is up almost 2% year to date. So, I mean, I asked you what gives last time. I'm going to ask it again. What gives right now?

KIM CATECHIS: You know, you give me all the easy questions, Kristin. Thanks for having me on the show. Look, I'm afraid to say my answer is going to be very repetitive. It's the same as last time. I think what's happening is that the market, as a generalization, has narrowed its horizons and brought them right in. So if we thought a year ago that Wall Street was looking six months ahead-- I said a month ago they're looking four weeks ahead. I mean, I don't see much has changed. The real world is happening, but it's divorced from what's happening in the S&P 500.

So the S&P 500 is made up, basically, of large companies that, you know, are doing rather well. And by the way, buybacks are back. So that's something I don't have the number for up to date, but I know they're back again. You know, I thought we weren't going to see them for a while.

We've got a bunch of technology stocks that are doing extremely well. I mean, in a world where, as I said, the real world is kind of forgotten about-- you've got 4.66, as you say, million Americans. You've got a second wave potentially starting in Europe right now where I'm based. You know, it shouldn't be this way.

However, the wall of money of stimulus that is out there-- you're talking, if you add up everything, the whole world has put together, all the different countries, you're looking at about 6% of GDP globally, and that is a massive number. So I think a lot of investors are just thinking I know that the situation is not sorted out. We still have massive uncertainty and problems. But in the meantime, I'm not going to stand in front of this runaway freight train of cash hitting the market.

When does that run out? I don't know, Kristin. I mean, I think if we fast forward a year, I don't think we're going to be quite so happy. We're going to be looking at a situation where huge amounts of debt are out there, not only at sovereign level. Big corporates, small, everyone's going to have more debt.

You know, credit agencies have already started work. You know, their job is to downgrade when things get stretched. So 42 sovereigns have been downgraded since March. 41, I think it is-- the last one was the US-- being put on a negative watch.

KRISTIN MYERS: So to that point about the markets taking a pretty narrow focus going forward, I want to talk about at least one big headwind to that right now, which is stimulus. We still have this being debated right now in Congress. I mean, how do you see the markets reacting if, you know, Congress continues to drag that fight on, if we don't see Americans getting that extra $600 boost? Last time they spent it, but what do you happening-- or do you think there's a test there if people actually say I'm going to actually hoard this money now and I'm not going to go back out there and spend it?

KIM CATECHIS: I think it's a very good point you're raising. I mean, look, starting off at the top, you're talking to a European, right? And I'm used to seeing the European Union agonize over, you know, big packages and whatever. I mean, they just managed to put something through a week ago, 750 billion euros, which a lot of people didn't really think they were going to actually get agreed.

If we come back to your question straight up, I think if I'm a consumer or a person who's being furloughed or unemployed in the US parlance, then I'm definitely going to be trying to horde the money. I'm just going to be trying to spend what I need just to keep the family going.

It's not good for the markets, obviously, if this package keeps getting dragged out. But I personally don't see a reason why they're suddenly going to see the light and agree to something overnight. You never know in politics, of course, but I think this may drag a bit, and that is going to hurt the market sentiment. Sentiment in the market is then going to say, well, it doesn't matter if they take a bit longer as long as we get the trillion dollars or maybe even a bit extra.

KRISTIN MYERS: So I know that you're in Europe, so I actually have a question about allocation investors that might have in their portfolios. Europe closing their borders down, being very stringent when it comes to their restrictions. They are farther ahead of us when it comes to the recovery, doing much better when it comes to containing the virus. Do you think American investors need to say perhaps I need to start reallocating some of my money into European markets?

KIM CATECHIS: Look, the short answer is yes but not just for the reasons that you've outlined. I mean, let's be clear here. Europe's apparent control of the virus is really only, I'd say, febrile right now. It's not that clear. We can't really say that we've done it. We can say we've kind of got a hold on it, but we haven't killed it off. It's still out there. We're getting more and more cases coming out as the tourist season opens and people start to move around.

But I think definitely if you think about the dollar strength that has been in play for the last year and six months, why wouldn't you? You know, at a time when the dollar is so strong and fundamentals are potentially getting weaker, you know, why wouldn't you allocate elsewhere?

And the last word I'd say on this is that, you know, Europe has been a region of the world where it's known for having fantastic luxury brands, unbeatable brand strength there. It's known for being, I mean, complicated, Byzantine politics. But it's actually also known as a location where investors have been disappointed because, you know, in the last 30 years, they've never actually got what they thought they were going to get out of Europe.

So maybe this is it. Maybe this is the time. I think one thing to watch would be the European Union's renewed enthusiasm for the Green Deal. You know, climate change is a big issue here. The population of Europe, generally speaking, is very pro doing something aggressive on climate change, even if it costs more. So I think I would watch this space as an investment location, definitely.

KRISTIN MYERS: Kim, I'm really glad that you mentioned luxury brands because you must have known I was going to be asking you about that next. I mean, there has been such strength there, despite the fact that apparently the world is on fire right now, and yet there has been such a demand in that space. Why do you think that is?

KIM CATECHIS: Look, the simple answer is the 47 million people in the world are worth more than a million dollars each liquid. So for them, life is OK. Yeah, they're inconvenienced, but these people don't live in the everyday life that we do. You know, that's-- you know, that's a tiny percentage of the population, the world population, but these are the people that are buying the Ferraris. You know, I mean, these are the people that are buying newly price raised, you know, LVMH bags.

KRISTIN MYERS: All right, Kim Catechis, head of investment strategy at Martin Currie, thank you again for that reminder. We have seen billionaires add a lot of money to their net worth over the last couple of weeks while we, of course, see millions struggle.