It’s not over yet — in fact, we’ve only just begun

Another day of high volatility — further withdrawal of earnings guidance by major companies, the start of dividend deferrals by banks in response to APRA’s instruction to cut payouts to shore up their balance sheets, and downward pressure on the credit ratings of state and federal government — showed that the financial markets are very much in the middle of the coronavirus crisis, not at the end.

The S&P/ASX 200 index traversed a 200 point range before closing down 0.9 per cent at 5206.9.

Property trusts rose as the code of conduct cleared up some uncertainty for commercial landlords, but banks were slammed by expected dividend cuts, with the majors down 3.3-5.3 per cent.

Meanwhile, pressure is building on industry super funds — in many cases with large amounts of illiquid assets — to sell shares to meet a flood of redemptions under the government’s early release scheme for those suffering financial hardship because of coronavirus lockdowns, with some experts saying the redemptions could be twice as much as the $27bn predicted by the government.

Other investors will be raising cash ahead of a torrent of heavily discounted equity capital raisings from companies shoring up their balance sheets to cope with what’s certain to be a severe recession globally, even if some jurisdictions are able to incrementally reduce lockdowns.

In the global financial crisis there were almost $100bn of recapitalisations, with brokers pocketing a handy $2bn in fees.

It comes amid an intense on who will be next to raise and institutions are working out how much cash they need.

The companies that recapitalise via equity raisings also tend to do extremely very well over the next year, so institutional investors are selling large cap stocks to be ready for the raisings.

UBS analyst Pieter Stoltz predicts a further significant fall in Australian corporate earnings per share estimates and the sharemarket given that the investment bank sees a “severe recession” caused by coronavirus.

He doesn’t think the local bourse will become quite as “cheap” relative to expected earnings per share as it did in past recessions, due to record low interest rates and the RBA’s “unlimited” quantitative easing, as well as larger fiscal stimulus — about 11 per cent of GDP so far versus 6 per cent in the GFC, and a likely faster recovery, given ample bank liquidity, albeit depending on some easing of mobility restrictions, which are assumed to happen late in the June quarter.

But while the rolling 12-month forward consensus price-to-earnings ratio of the ASX 200 index was 14.7 times as of Tuesday, the “consensus doesn’t appear to have fully accounted for COVID-19 due to uncertainty in the range of outcomes”.

“So far the consensus only expects a 3 per cent contraction in market earnings per share next year relative to last, but given our economists’ view of a severe recession, further downward EPS revisions appear almost inevitable,” Stoltz says.

He estimates that in a six-month “hibernation scenario”, market EPS could fall 35 per cent.

Using that “trough” EPS estimate and assuming capital raisings of 5 per cent of the market’s market capitalisation, he comes up with a current price-to-trough PE ratio of 22 times.

Based on the 1991 and 2008 recessions, when the trough PE ratio was about 16 times in both instances, he thinks the current trough PE ratio of 22 times “implies downside for the market”.

“We think it is unlikely the S&P/ASX 200 will reach a trough PE ratio below 17 times because of the unprecedented degree of fiscal and monetary intervention,” he said.

Backsolving for a maximum 22.7 per cent fall gives a minimum target of 4060 points.

“Given our analysis implies further downside from here, we still favour defensive sectors as per our last model portfolio update,” Stolz says.

He likes APA and Aurizon given their take-or-pay contract structures, Woolworths for its strong near-term sales and A2 Milk because it’s set to maintain strong revenue growth.

In health, he favours CSL for plasma therapies and flu vaccines and Resmed for ventilator sales.

But Stoltz is cautious on discretionary retail due to lower ­discretionary spending from COVID-19 and other financials where market volatility is likely to drive fund outflows.