Are Markets Having a Pre-Covid Deja-Vu?

The current market environment most closely resembles late January 2020, when the realisation that a new respiratory virus in China may be more than a localised flu derailed a stock market rally and triggered sudden shifts into safe-haven assets. 

This is according to our Macroscope model that examines past market regimes and looks for emerging patterns that help us anticipate how current macroeconomic conditions might interact with political developments.

In January 2020, markets weren’t yet in pandemic freefall (and the model suggests the current period is least like August 2008, the eve of the Lehman Brothers collapse which was followed by the Great Financial Crisis) but COVID had definitely knocked on the S&P’s door. This prompted rotations between sectors, asset classes and swings in sentiment as governments around the world were trying to work out their responses.

Model turns defensive

It’s probably not surprising that the Macroscope has turned more defensive and overweight in quality factors, suggesting investors may want to consider prioritising companies with strong balance sheets, consistent earnings, and lower volatility profiles. The current environment continues to support risk assets, but it demands more selectivity going into the fourth quarter.

Figure 1. Quality haven in turbulent times

Source: Man Numeric, MSCI Barra as of 3 October 2025.

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Investors need to reconcile the geopolitical noise of a US government shutdown, renewed tariff fears, further escalations of global wars and sticky inflation with new stock market highs driven by an AI capex boom that no-one knows how long will last. 

Incidentally, the Macroscope model has identified July 2024 as the second-most similar period to today, when robust earnings growth coincided with a sudden shift away from the Magnificent 7 tech giants that had powered recent gains. It was also the month when Donald Trump survived an assassination attempt while on the presidential campaign trail.

Where’s the Fed?

Traditionally, investors looked to the Federal Reserve (Fed) to break the cycle of uncertainty and restore sustainable risk appetite. However, the central bank finds itself in a bind with mixed signals about the health of the economy and the government shutdown delaying crucial data, such as payroll numbers. While GDP and consumer spending have held up so far, the job market is weakening and inflation remains stubbornly above its 2% target, leaving policymakers divided over the future rate cut path. All the while they’re under political pressure from the administration.

History never repeats but often rhymes. The current environment also echoes central bank inflection points of January 2020 (after the Fed had just completed its 2019 "insurance cuts" amid trade war concerns) and July 2024 when markets were pricing in a dovish pivot.

Wars and political crises

Outside the US, there’s uncertainty about peace efforts in the Middle East and few signs of a resolution in Ukraine. There are now added concerns about a renewed escalation with a wave of incursions into NATO airspace by Russian aircraft. Argentina’s currency is under pressure after President Javier Milei’s libertarian party suffered a crushing defeat in local elections in September, increasing concern about their prospects at this month’s mid-term elections. France is roiled by a political crisis.

January 2020 felt manageable until it didn't. Whether today's uncertainties follow the same path is anyone's guess, but the model is clearly hedging its bets.

Author: Valerie Xiang, a Portfolio Manager at Man Numeric.

Inflation may temper Takaichi’s political ambitions for Japan

Last Saturday, Japan’s ruling Liberal Democratic Party (LDP) elected a new leader, Sanae Takaichi. This was a slight surprise as it had been a two-horse race between her and Shinjiro Koizumi, with the latter being the favourite in most polls. Takaichi is widely expected to be confirmed as Prime Minister over the next few weeks.

This marks quite a moment for Japan as she will become their first female PM. The equity market reaction was eye catching, we think because her instinct is pro-growth/pro-market, but there are some obstacles along the road which we need to point out.

She’s known as a hardline conservative and towards the right of the LDP. One of her heroes is Margaret Thatcher. This may help in the LDP’s battle against the relatively new populist party (Sanseito).

Abe’s protégé

Often dubbed as former Prime Minister Shinzo Abe’s protégé she is a big supporter of Abenomics and the policies behind it (easy monetary policy, fiscal expansion, national security hawk, and somewhat anti-immigration). However, in recent weeks she has dialled these down a little bit.

There are two issues which may limit what she would really like to do. The first is that inflation remains the critical issue in Japan. Higher rates and a stronger yen will be needed to help control this (particularly the yen to limit food inflation).

The second problem is that the minority LDP-Komeito coalition will need to be friendly with opposition parties to get any policies through. It’s also worth remembering that the post-war median length of stay for a Japanese PM is just 1.6 years.

There were some quite punchy market reactions. The Nikkei was up 4.8%, one of its strongest days over the past five years. The yen weakened from 147.50 yen against the US dollar to 150.40 yen. Defence names were up around 10%, nuclear and AI-related were also strong.

Takaichi’s dovish tilt

The bank sector was down slightly with the market expecting Takaichi to remain dovish. We do wonder how much of a case of traveling versus arriving this is. It is widely known she wants more defence spending, and these names have already performed exceptionally well.

But given the LDP's weak position, they may not be able to push through as much of an increase in defence spending as hoped. Also, controlling inflation will be key to her (and the LDP's) success. A weaker yen isn't helpful for this and isn't what US President Trump and Treasury Secretary Scott Bessent want to see. Our analysis suggests the possibility of another Bank of Japan (BoJ) rate hike before year end, although October is looking a little less likely now. Two key events this month will be Trump’s visit to Japan from 27 to 29 October and the next BoJ meeting on 30 October.

BoJ policy normalisation is still needed. Although the pace may now be a little slower. The valuation of banks remains appealing with price-to-book ratios around 1x or less, and decent dividend yields. Given the strong market, defensive names have been falling to new relative lows. Profit is being taken on higher price-to-book names that have been recent winners – basically tech and machinery names.

And finally, Takaichi is a keen biker and heavy metal drummer. This is certainly higher octane than her predecessor Shigero Ishiba, and his model railways!

All data sourced from Bloomberg unless otherwise stated.

Author: Stephen Harget, a Portfolio Manager covering Japanese equities at Man Group.