The outbreak of covid-19 has undeniably wreaked havoc on a global scale. With roughly half of the world’s population in lockdown, the economic cost of the pandemic has been huge, with some economies expected to contract by up to one quarter over the next couple of months.
The economic costs of the lockdown mean that most likely the world has already entered its sharpest recession ever, writes Terence Moll, head of investment strategy at 7IM.
The numbers we will see in the next few months will be ghastly, with the case in point being the US announcing a 4.8% drop in GDP in Q1. Given they had barely instigated a lockdown until the end of March, the next quarter will likely be worse still.
The silver lining is that we expect this to be short lived because governments everywhere have realised how vital it is to protect their populaces from this economic storm and have acted to do so.
It will take time
In the UK and US, looming fiscal assistance is estimated at 10-15% of GDP but government spending could far exceed this, as it is clear they are prepared to do whatever it takes to help regain economic stability.
Recovery will not be immediate – it may be several years before unemployment numbers improve and people start spending again – but through a combination of science, planning, cooperation and a bit of good fortune, sooner or later we will find the answer.
For investors, the story has moved rapidly. We are in an environment which looks more uncertain than any since 2008.
The big question now is how should investors manage portfolios in a post-covid-19 world?
Fingers in many pies
Diversification is designed for unexpected and unstable markets. For advisers and their clients, it makes sense to aim to hold a little of everything to ensure that an unforeseen event – like covid-19 – does not negatively impact an entire portfolio.
It might be tempting to pile into certain sectors which look cheap now – like equities – after the scale of the falls we have seen, but diversification now is more important than ever for advisers.
Spreading investments across a diverse range of asset classes, companies, sectors and geographical regions will greatly reduce the chance that one event will affect all your holdings.
Diversification also helps reassure more cautious clients and allows investment managers to remain calm and emotionally unbiased in the face of market setbacks in the future.
Bargain hunting
Nonetheless, there are some key trends to look at now. European dividends, for example, look attractive now as they can be traded as a stand-alone investment, separate from share prices of the companies that pay them.
The market is currently valuing 2023 dividends at two-fifths lower than three months ago. This is a great opportunity as despite many European companies now struggling we think that most of them will come through this, meaning their future dividends look cheap.
US healthcare companies should also do well out of an aging population, and it has defensive qualities, and we have allocated there.
Inflation is also another theme that advisers and their clients should be looking at post-pandemic. Markets are pricing in 1.3% inflation for the 30 years in the US – this seems far too pessimistic, so having some inflation protection seems sensible.
One of the biggest opportunities we see currently is in the credit markets. Right now, both investment grade and high yield bonds look very interesting. The yields on many corporate bonds are at levels we have not seen in a decade; bonds of high-quality companies are now being sold as if they were heading for bankruptcy.
Corporate bonds tend to recover more quickly than equity markets following a sell-off. After the financial crisis, it took US equities until 2012 to make back their losses. It only took the high yield bond market until the end of 2009.
The outlook for credit markets is far better than most investors realise, particularly given the government support we have seen for businesses across the world, with promises to guarantee loans, subsidise businesses and pay staff’s wages.
Heading for cash? Think again
It is crucial moving forward to be wary of cash. Advisers have no doubt had some tough conversations with panicked clients, but while selling equities now might allow those same clients to breathe a sigh of relief for being out of the market, cash is a loser in the long run.
It is incredibly hard to time when to buy equities again, so it is better to hold onto a range of assets long term and accept that they will go up and down along the way.
This article was written for International Adviser by Terence Moll, head of investment strategy at 7IM
