It’s important to have a handle on how worst-case scenarios could impact your investments, but it’s equally important to take a balanced view, as our expert wealth managers explain.
Markets versus the macroeconomic outlook is painting a perplexing picture, but certain equities and fixed income instruments might have the balance of risk protection and reward many seek. Here is how experts from our wealth manager panel see the current investment conundrum.
Attention is called to signs that we may be back in bull market territory
Investors warned to brace for further bad news, and ongoing headwinds
FAANG technology companies are hailed as the new safe havens
The capital protection potential of investment grade credit is highlighted
Financial markets are perplexing: after declines in excess of 30% in March, global equities bounced back strongly in April – this, in spite of the fact that a huge proportion of economic activity has ground to a halt.
At the time of writing, the S&P 500 is actually up over 12 months. Can this strength in equity prices continue? Only a very brave person would suggest that we’ve seen the last of the market dislocations in the wake of the Covid-19 crisis. Having said that, there are at least three reasons for optimism.
Only a very brave person would suggest that we’ve seen the last of the market dislocations in the wake of the Covid-19 crisis. Having said that, there are at least three reasons for optimism
Firstly, markets are discounting mechanisms, looking far into the future. Share prices today are already taking into account consensus estimates of a potential recovery in 2021 and beyond.
Secondly, the stock market is but a narrow representation of the real economy. The florist on your high street might not be able to reopen when the lockdown finishes, but it’s probably not listed either. It’s the largest and strongest businesses in the world that are members of stock exchanges, and dominant companies like Microsoft will probably get through this crisis with an even stronger business than before.
Finally, the US Federal Reserve has once again been acting in financial markets as a buyer of last resort. Many believe that their participation in the market is artificial and manipulative, but whether you like them or not, it has never been a good idea to fight the Fed. Perhaps we’re back in bull market territory after all.
Chief Investment Officer at Credo Wealth
The market is in the grip of two opposing bull and bear forces – on one side, economic stagnation and the impact of lockdown; on the other, a huge programme of fiscal and monetary stimulus.
This could be a prolonged battle. At the time of writing there has been a rebound for equities since the lows in late March, but it may be the equivalent of one of those gentle uplifts you get on a rollercoaster ride before the next dizzying plunge.
The economic fallout will follow the medical one. We expect more bad news to emerge – rising unemployment and falling business and consumer confidence, as well as a resetting of economists’ and analysts’ forecasts.
The economic fallout will follow the medical one. We expect more bad news to emerge – rising unemployment and falling business and consumer confidence, as well as a resetting of economists’ and analysts’ forecasts
When the lockdown is lifted fully we may see pent-up demand released initially but the long-term psychological impacts are likely to linger. And there are many practicalities to overcome. Social distancing is here for some time and will seriously impact many businesses for months.
There will be longer term behavioural changes, too – corporate travel may be reduced permanently and people may be cautious generally about spending.
We still favour having equity exposure in portfolios but we are underweight versus our long-term, strategic positioning. Our big overweight is in cash. We are holding nearly four times as much as normal (which has been accumulated from selling equities early on). This gives portfolios stability and managers the capacity for opportunistic buying when we are confident markets have turned.
Partner and Portfolio Manager at James Hambro & Partners
Investors would be forgiven for swinging between extreme fear and optimism at present due to the mismatch between the economic outlook and markets. Getting the balance right so you participate in any upside, but also insulate your portfolio from further shocks is incredibly difficult right now. Now is the time to get proactive and make sure you have all the angles covered. Why not speak free of charge to a few of our panel wealth managers and get their views on your strategy?
It’s easy to fall in love with technology stocks. There is scalability, marvellous jargon and who doesn’t feel good about owning a piece of the future? Maybe that’s why the Nasdaq index is now up on the year, whereas every other major global equity index is still very much stuck in Coronavirus quagmire. The so-called FAANGs, that is Facebook, Amazon, Apple, Netflix and Google now have a market capitalisation of $4.1 trillion and produce much of the growth in global stocks.
Of course, we have been here before, and the crash of 2001 was a stark reminder that sometimes expectations are too great for even the most amazing technologies.
The so-called FAANGs, that is Facebook, Amazon, Apple, Netflix and Google now have a market capitalisation of $4.1 trillion and produce much of the growth in global stocks
This time around, it seems different though and rather than crash with the rest of the market, the FAANGs have actually provided support for the world. These young companies have matured in a way we could never think possible when Amazon was just an online bookstore, Netflix just had re-runs of some old movies and Yahoo was still our preferred browser. Maybe this performance is even a final vindication of what the fuss was all about when we first discovered the amazing potential of a digital world.
Will these fabled stocks that have bestowed so many billions of dollars to their owners and shareholders go up forever? Probably not and just like IBM in the eighties, or Compaq in the nineties, so too these stocks will pass the torch when new technologies take over the world. Until then, enjoy the ride as FAANGs are the new safe havens.
Chief Investment Officer at Blu Family Office
The past few weeks have seen a clear divergence between economic indicators and asset prices, likely driven by policy support from central banks and governments alike. Whilst economic indicators such as unemployment, retail sales and inflation dip lower, we have seen equity markets bounce back strongly from their recent lows.
Whilst this has been welcome news for investors who continue to hold equities, the immediate future remains unclear, causing a note of caution across our Investment Committee. Periods of double-digit returns in the space of only a few weeks are not to be ignored, regardless of the economic backdrop. Accordingly, we decided to take some profits on our clients’ equities exposures.
Historically, investment grade companies have tended to be able to pay their debts – even through periods of stress, such as 2008 – and credit markets now have the buying support of most powerful buyer in the world (The Fed)
The more challenging question however remains: where to invest? Looking back at history, one thing has been clear: Don’t fight the Fed. The US Federal Reserve’s buying programme began with US Treasuries, expanded to US mortgages before turning to investment grade corporate bonds in fairly short order. Although the former two assets now yield next to nothing, investment grade credit might still offer some value, with income yields approaching 5% in some areas.
Historically, investment grade companies have tended to be able to pay their debts – even through periods of stress, such as 2008 – and credit markets now have the buying support of most powerful buyer in the world (The Fed). We hope this backdrop will serve to protect our clients’ capital should there be further volatility in the months ahead.
Director, Investment Management, at Arbuthnot Latham & Co., Limited
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.