28 May 2020
Positioning your portfolio for the risks and opportunities ahead
Yoram Lustig, Head of Multi-Asset Solutions, EMEA
Although money‑printing quantitative easing could be inflationary, inflation is unlikely to rise in the short term...
To help answer these questions, we have identified five key themes that we believe will drive the performance of investor portfolios over the next year. Our themes are based on how we believe the global economy will perform over time and the investment implications arising from that. For each theme, we offer three investment ideas. The five themes are (1) recession, (2) low oil prices and yields during the recession and until the economy recovers, (3) stimulus, (4) the recovery that follows the stimulus, and (5) the need at all times to use an active edge.
Some sectors are likely to continue to be winners. If the recovery stalls and lockdowns and social distancing remain in place for a longer period, technology may benefit, allowing for remote connectivity, online shopping, and cloud computing. This is on top of ongoing technology‑led disruption, where investors should be on the side of the disruptors, not the disrupted. If the coronavirus makes a comeback after the summer before a vaccine is developed, health care will remain critical.
Policymakers are all in—they are unlikely to be able to reverse their policies until the economy finds a strong footing.
Bond yields are low and are likely to remain so for the next 12 months. Low yields make it harder for banks to make a profit. Growth stocks in the U.S. may continue to outperform value stocks because 40% of the Russell 1000 Growth Index is technology while 20% of the Russell 1000 Value Index is financials and 5% is energy (0% in the Russell 1000 Growth Index).2 Low oil prices and low yields mean there will be some losers and some winners.
This environment is an opportunity for skilled active managers to make a difference...
Policymakers are all in—they are unlikely to be able to reverse their policies until the economy finds a strong footing. These policies have created both challenges and opportunities for investors. The three investment ideas here focus on (1) yield scarcity—when cash and government bonds yield close to nothing, (2) piggybacking central banks—buy what they buy, and (3) risk assets—in a flood, everything floats.
For the recovery to be sustainable, markets needed three things: (1) the peak infection rate to have passed, (2) a convincing and aggressive monetary and fiscal stimulus, and (3) receding volatility. Although all three are in place, many unknowns linger: a risk of a second wave of infections, the ability of a scarred economy to recover, and the pace of returning to a new version of normality. One scenario is for a steep and strong economic recovery in the second half of 2020; another is for a gradual recovery into 2021. One thing is sure: The crisis will end, and a recovery will begin.
The three investment ideas here are (1) diversification—true diversification, not perceived diversification, as some assets (e.g., corporate bonds, commodities) might exhibit low correlation with equities in good times but high correlation in bad times; (2) balancing offense and defense; and (3) flexibility—portfolios must be nimble, ready to adjust.
The dispersion in returns among markets, sectors, and securities has widened considerably. Recessions bring a process of constructive destruction through which corporations that should fail do so. This environment is an opportunity for skilled active managers to make a difference by selecting markets and sectors that are likely to fare better and differentiate between corporations with strong balance sheets, viable businesses, and sustainable cash flows and those with weak businesses. The zombification process—through which cheap money enables corporations that should have perished to survive through cheap loans—may come to its end. In a process of survival of the fittest, the fittest active managers can select the survivors.
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