On Thursday, 26 March, our Investment Solutions specialists Rupert Watson, Head of Asset Allocation, Andrew McDougall, Head of Portfolio Management, and Aisling Doherty, Senior Portfolio Manager, Fixed Income, hosted a webinar on the latest investment implications due to coronavirus.
We have summarised the key elements from the call and the investment activities that we believe can be taken to help address some of these challenges.
What is happening?
The US has quickly caught up and looks set to lead the world with its number of cases of Covid-19, as many nations look to Asia to learn how the virus can be contained.
However, the next key point that policymakers are keen to understand is the extent of the economic damage China and its nearby neighbours sustained, and how long this lockdown elsewhere may have to continue.
Politicians, central bankers, business owners and even the general public are seeking answers on when they might expect a rebound, and what this might look like. Of course, the rebound depends entirely on each jurisdiction’s own policy response, with recent examples seeing trillions in national currency being funnelled into business and markets.
Already we are seeing the devastating impact Covid19 is having on financial markets and the economy itself. From an average growth rate of around 2% a year, the US is estimated to see its economy contract by up to 40 percentage points in the second quarter of 2020 – which starts next week. This would be the sharpest fall the world’s largest economy has seen since the global financial crisis.
Already records have been broken with this week’s jobless figures spiking by more than 3 million people, dwarfing any previous increase in the past 50 years. To give context, during the financial crisis, the highest number of weekly job losses was around 700,000. There is certainly more shedding to come.
With volatility returning with gusto to financial markets, with many losing years’ worth of gains, now might be seen as a buying opportunity. However, remember that valuation is the most important tool we have over the long term, and while US equites may look cheaper than they have done for some time, our analysis shows they are not yet ready to be classed as “cheap”.
The good news
Some asset classes have hit fairer valuation levels though, with certain types of credit now looking attractive. Central banks and governments are doing all they can to avoid waves of business going under, pumping cash into markets and directly on to balance sheets. We think this means the actual number of defaults will be lower than the market is pricing into high yield and investment grade bonds.
However, while it is true these bonds are offering better value than even in the financial crisis, each opportunity needs to be examined on its own merit. Additionally, even what is seen as the best opportunity may not fit with your strategic asset allocation, which is still the right path to follow to reach your objective.
In our view, there is another good news: multi-asset credit can offer access to opportunities.
On a human level, Asia appears to be emerging from the worst of its epidemic and manufacturers around the world are pulling together to build and distribute vital healthcare apparatus.
What does this mean for investors?
It is at times such as this that the value of a robust portfolio becomes clear as it may help keep you on the journey to your destination.
Diversification is key as amid volatile and uncertain markets it spreads the risk and return drivers, helping losses and drawdowns to be at least partially offset elsewhere.
For example, while equities took a significant hit over the past two weeks, fixed income and liquid alternatives suffered by between a quarter to two-thirds less, based on our sources.
Rethinking equity allocation can help to provide a degree of protection, too. By holding a bias towards low volatility equities, we aim to capture the equity risk premium offered by these carefully selected stocks, while maintaining what we see as a resilient portfolio.
Allocating to a diversified range of managers, too, can help offer some protection.
If your diversification is working well – or more importantly, if it isn’t – now is a great time to check up on your decision making. In these wild times, it is too easy to fall into conformation biases and anchoring tendencies, so be aware and check your behavioural finance learnings to avoid it.
It is also a good time to check up on whether the outcomes you are getting are what you expected and raise red flags over both strategies and managers throwing curve balls. But while there may be plenty of opportunities ahead, investors should remain guided by their initial asset allocation and ensure that any decisions are made with their original strategy in mind.
Rather than batten down the hatches, we are conducting almost double our usual number of due diligence meetings with managers to ensure we are all on the same page and consistent in our objectives.
There is some hope that existing medication may have a positive effect on Covid19 patients, but we are a long way from finding a cure or creating a vaccine. Lockdown is having an impact on the number of new cases in Europe, echoing success in China, but globally figures are rising rapidly.
With all the uncertainty, we have no strong view over what the short to medium term holds for financial markets. But for investors, being prepared and having a robust governance framework in place is vital in this type of environment to help you reach your objectives despite the current turbulence.
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