Inflation risk is top of the agenda, but investors can proactively protect their portfolios by considering commodities and infrastructure - particularly if they choose specific kinds.
Investors are simultaneously mulling how to find safety and position their portfolios for what might be a radically altered future. Here, experts from our panel institutions offer valuable tips on where to seek both refuge and reward.
Experts advocate certain corporate bonds as important safe havens
Those reliant on equity dividend income are urged to take stock
Investors are reminded to root buying decisions in their broader strategy
Asia tipped to continue gaining ground relative to the rest of the world
It has become increasingly clear that “safety” is now a term that is extinct in financial markets. Certainly, government bonds have gained this year as economic fears have grown, as interest rates have plummeted and investors have sought the perceived safety of such assets, but this perceived view of the asset class as a “safe haven” is increasingly challenged as we move forward.
With the vast amount of supply of such assets set to balloon in both the near and distant future (to pay for the effects of this crisis and to cover future liabilities) and with yields already basically at zero, the prospects for further capital appreciation from government bonds is very limited. It is likely that risks have risen due to the twin threats of oversupply and a return of inflation, expediated by the hyperactive tendencies of governments.
Gold should be a key beneficiary of these fears, but notably it has been very volatile in the last few months, although we now expect its protective qualities to shine through. Gold should perform well as markets come to the same realisation that we have, namely that the temporary money-printing activities of central banks will not be “temporary”.
Our approach is to hold high-quality, short-duration corporate fixed interest investments. Such investments have not provided the same protection as government bonds in the last few months, but they offer a yield and the potential for positive returns
But where else can we find “surety”? Our approach is to hold high-quality, short-duration corporate fixed interest investments. Such investments have not provided the same protection as government bonds in the last few months, but they offer a yield and the potential for positive returns. We view the likelihood of default of such assets as remote, not least as central banks have stepped in to support corporate bond markets. In addition, we continue to hold a decent cash buffer, both to afford some short-term protection and to allow us to invest opportunistically.
Chief Investment Officer at Punter Southall Wealth
As if investors aren’t having a hard enough time at the moment. With trillions wiped off markets, investors are in possession of investment portfolios and pensions that are looking considerably less valuable than they were before Christmas. Added to that, many are now looking at a big drop off in dividend income.
Almost 200 companies listed on the London Stock Exchange (LSE) have announced they have waived or suspended dividend payouts. And you can understand why – companies are under acute pressure to conserve cash in the current environment. Given this flight to liquidity, even perfectly sound companies with rock-solid balance sheets have decided to cut dividends or to defer payments until later this year. Although this is understandable for companies in survival mode, for investors reliant on dividend income, this is not great news.
First among the areas looking particularly unhealthy are oil companies, which made up around 20% of UK dividend income in 2019. Although they can probably maintain dividend payments throughout 2020, the price war between Russia and Saudi Arabia could cause some serious problems down the line, even after the OPEC+ agreement to cut output last week.
There is some good news. Mining companies are big dividend-payers and cashflows could remain robust for some time from this sector. And tobacco companies – although not to everyone’s taste – are big dividend-payers, although they might come under pressure
Next are “special dividends”, which made up 11% of UK dividends in 2019. This source of income will probably disappear for the time being.
Finally, banks: they had become big income generators, but have now pulled dividends for the time being at the behest of the UK and European regulators.
There is some good news. Mining companies are big dividend-payers and cashflows could remain robust for some time from this sector. And tobacco companies – although not to everyone’s taste – are big dividend-payers, although they might come under pressure. In a worst-case scenario, we think up to 50% of the UK’s dividend income might disappear in the first half of 2020. Even so, at some stage, we will start to see light at the end of the tunnel and it is possible cut dividend payments will be reinstated.
Deputy Chief Investment Officer at Canaccord Genuity Wealth Management
We remain in the midst of an unprecedented crisis, but there is still a lot that can be done right now to protect your wealth and position your portfolio for future growth. In fact, actions taken during a low point will reverberate down the years. If you want to ensure your wealth is being looked after as proactively as possible, why not speak free of charge to our panel wealth managers and get their views on your strategy?
At a time like this, I expect people will be looking for some pointers on whether they should invest now and what the opportunities might be. If you are one of those people, my overwhelming message is to think about what you want your investments to achieve.
If you want to generate an income from your investments for example, you might want to take a look at investment trusts which focus on the UK stock market. Investment trusts are allowed to set aside a proportion of the income they receive each year and gradually build up reserves to ensure they can continue to pay out an income in lean years. At the moment, some trusts have enough reserves to pay out their previous level of income for two years – even if all of the companies they invest in cut their dividends entirely.
You can still include a few UK investment trusts in your portfolio if your aim is to grow your money, but you probably want to focus on areas which offer stronger long-term growth. Investing in companies in cutting-edge sectors are a good place to start.
If you want to generate an income from your investments for example, you might want to take a look at investment trusts which focus on the UK stock market
What if you are more cautious and want the value of your investments to gradually rise but not take too much risk? Start looking at asset classes like investment grade bonds which are looking more attractive now, as well as certain absolute return funds. Exposure to traditional safe haven assets like government bonds is fine, but they have done extremely well over the first quarter of 2020. Diversify your lower-risk assets and start thinking about adding a small allocation to higher-risk assets like shares, perhaps spread out over the next six months.
While it can be a bit wearing to hear the age-old advice that it is time in the market rather than timing the market, that does not make it any less true. Whatever type of investor you are though, make sure any advice is tailored to your own circumstances and do not be afraid to ask questions of the professionals. We are here to help after all.
Investment Manager at Quilter Cheviot
After a promising start, the first quarter of 2020 has undoubtedly been one of the most extraordinary and difficult periods any of us are likely to experience in our lifetimes.
Whilst we believe the coast is not yet clear on several fronts, we are, however, probably getting closer to the point where investors may wish to put some risk back on the table. In all likelihood markets will move in a more positive direction well before the underlying data, and those with the sturdiest constitutions to invest at what, in due course, turn out to be the very bleakest moments of market panic are the ones most likely to be rewarded with the strongest returns from that point.
Crossing the bridge from fear and uncertainty on one side to a land of optimism and opportunity on the other is often a very wobbly experience, and it can frequently take some time. As a discretionary investment manager, we are unlikely to pinpoint the optimal time to start that journey – generally only the very lucky manage, in hindsight, to do this – but we do already have commitments to markets that will automatically benefit. We can also prepare for the next leg, which is what we are doing now.
Our attention is not only likely to focus on those areas that have seen some of the sharpest falls, but also regions that are less likely to be burdened longer term by the financing of the monetary and fiscal policies currently being rolled out to address this crisis
Our attention is not only likely to focus on those areas that have seen some of the sharpest falls, but also regions that are less likely to be burdened longer term by the financing of the monetary and fiscal policies currently being rolled out to address this crisis. The latter point currently points towards Asia gaining further ground relative to the rest of the world.
Remaining disciplined, drawing upon experience and having the ability to look through near-term uncertainty are all key components of any successful investment process, so we are sticking firmly to these principles and doing all we can to both safeguard our clients’ wealth and expose it to whatever opportunities we see available.
Chief Investment Officer at Bordier UK
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.