The chief executive officer of Platinum Asset Management Ltd (ASX: PTM), Andrew Clifford, has warned bullish investors not to get ahead of themselves.
In his monthly macro update, Mr Clifford warned that the S&P/ASX 200 Index (ASX: XJO) and other global markets could return to their lows and potentially even fall further.
Why could the market drop lower again?
Platinum's chief executive has concerns that the recent share market rally could be premature.
Mr Clifford advised that he expects the recovery in economic activity to begin when people can go back to work. Though, this won't necessarily be a swift one and could take some time until a full recovery occurs.
However, he believes that share markets will anticipate the full recovery well ahead of its actual occurrence, just like they did following the global financial crisis.
Whilst this hints that the recent rally could be a sign that the market is now anticipating the full recovery, he warns that there were rallies in markets of the order of 20% on two occasions in the latter months of 2008. These rallies eventually ran out of steam and led to markets falling to new lows.
Ultimately, Platinum's chief executive expects the market to reach its low at the point of greatest uncertainty. The big question is whether this has occurred or is still yet to come.
Mr Clifford believes there are still many unanswered questions at this point, which could support the view that uncertainty has not yet peaked.
He said: "Besides the length of the lockdowns occurring around the world, the quantum of the economic loss is far from clear."
"Additionally, the impact of the slowdown on company profits is not linear. Companies with high fixed overheads will incur significant losses and will need to either take on debt or issue equity to survive. Others may find profits suppressed for a number of years if revenues remain subdued. Probably of greatest concern is what appears to be a highly disorganised response in the US, the world's largest economy," he added.
What now?
Platinum's view is that markets will likely return to their recent lows and possibly fall further.
It feels this is likely to occur relatively quickly as many of the uncertainties start to be better understood with each passing day. Though, it did advise that its view on this may change quickly.
How is Platinum identifying opportunities?
The chief executive provided investors with an insight into how the company is identifying investment opportunities in the current environment.
In order to find value in shares, Platinum is taking a view on the earnings power of companies three to five years in the future. It then adjusts valuations for losses that it expects these companies to accrue during the worst of the downturn. It also assumes a reasonable rebound in future economic activity in aggregate, but not for this to play out evenly across all industries.
He commented: "On this front, we have a mixed view. There are many extremely attractively priced companies, particularly in cyclical areas and those areas directly impacted, such as travel."
But not all shares are considered cheap following the market crash. The chief executive warned that "many market darlings of recent years, while having been sold off, have continued to perform better than the broad market and remain expensive."
Foolish Takeaway.
While another sharp pullback in the ASX 200 is always possible, I'm optimistic that the market is over the worst of it now.
In light of this, while I wouldn't suggest investors go all in, I think now is a good time to start investing in shares that have been left undervalued following the crash.
