In­vestors must be savvier dur­ing this re­ces­sion to de­fend port­fo­lios

The Daily Telegraph - Business - - Business - TAHA LOKHANDWAL­A

We have fi­nally seen the eco­nomic im­pact of the lock­down. A 20pc fall in the coun­try’s econ­omy over the three months to June, leav­ing many in­vestors turn­ing to safety as they won­der what mar­kets will do next.

There are two ways to look at this re­ces­sion, the coun­try’s first since June 2009. Long-term in­vestors know that stay­ing in­vested in stocks, even through a re­ces­sion, will bear fruit. But that doesn’t mean in­vestors can’t make short-term plays or a few tac­ti­cal changes to boost re­turns.

The first thing to as­sess is the re­ces­sion it­self: how long will it last and how bad will it be? A 20pc fall over three months is cat­a­strophic, but also ex­pected. A sharp rise in the next quar­ter is likely, but af­ter that we’re in a tough pe­riod.

Our eco­nomic malaise could eas­ily last as long as last time: 15 months. So where should you in­vest, and does 2009 of­fer a guide? Back then stocks were gen­er­ally bad – the best per­form­ing mar­ket was Ja­pan, which lost 6pc. UK gov­ern­ment bonds did a job as a safe haven and re­turned 10pc. Savers could have even made 5.5pc from cash, out­strip­ping 4.5pc in­fla­tion.

Some in­vestors backed “safe” in­dus­tries and made de­cent re­turns. Pharma stocks and tech busi­nesses re­turned 15pc and 11pc re­spec­tively; even the oil giants only lost you 7.7pc, while the mar­ket lost 24pc on av­er­age.

But since 2009, cen­tral banks around the world have been print­ing money – known as quan­ti­ta­tive eas­ing – and this has dis­torted mar­kets. This time, in­vestors must be savvier about both de­fend­ing and boost­ing port­fo­lios. One as­set act­ing very dif­fer­ently this time around is gold, this year’s star per­former. It lost 6pc dur­ing the last re­ces­sion but the price was up 34pc at its peak last week since Fe­bru­ary.

Cen­tral banks are largely be­hind this, as is the weaker dol­lar, which makes gold cheaper to buy. But the pre­cious metal is prone to volatil­ity and has lost 6pc this week alone. It will al­ways be a rel­a­tively safe as­set to di­ver­sify one’s port­fo­lio and shouldn’t make up more than 10pc of sav­ings.

In­vestors could add more as a short-term growth play. How­ever, be wary of price drops like this week and ac­cept that the ma­jor­ity of the profit may have al­ready been made.

Find­ing the hid­den gem within Bri­tish stocks is also dif­fi­cult now. The mar­ket is down 16pc, the worst among global peers. This en­com­passes Brexit, a stronger pound ver­sus the dol­lar and the in­dex’s heavy weight to oil stocks.

In­di­vid­ual stocks will still make good re­turns – but build­ing a port­fo­lio of short-term win­ners will be nigh on im­pos­si­ble. It will ex­pose in­vestors to high lev­els of risk and is un­likely to pro­vide re­turns nor de­fence.

Cen­tral banks have helped in­vestors in one way: be­cause they pumped even more money into mar­kets, to limit the im­pact of the pan­demic, re­turns from gov­ern­ment bonds have done well – up 4.4pc since Fe­bru­ary. But for now, bonds is­sued by busi­nesses could serve in­vestors bet­ter.

The mar­ket dipped amid the car­nage in Fe­bru­ary and March but has since re­cov­ered its losses and done so quicker than stock mar­kets. Cor­po­rate bonds is­sued in ster­ling are up 2pc

since Fe­bru­ary. Yields, while not fan­tas­tic, pro­vide enough re­turn for it to be a bet­ter risk/re­ward trade.

There will, of course, be bumps in the road, but highly rated cor­po­rate debt can of­fer se­cu­rity and small re­turns. In­vestors seek­ing more can ven­ture down the credit rat­ings scale and use higher yields to boost re­turns.

One area that is a no-go this time is cash. In­fla­tion will erode away any fee­ble yields from sav­ings ac­counts. In­stead, short-term gov­ern­ment bonds could be use­ful. The yield on these has risen as mar­kets are un­sure about the short-term eco­nomic outlook. This could pro­vide a good en­try point for a rel­a­tively safe in­vest­ment.

In­vestors can­not ex­pect an im­i­ta­tion of what did well in 2009. This time around the re­ces­sion is of an en­tirely dif­fer­ent na­ture, a global pan­demic rather than a bank­ing cri­sis. But there is more cen­tral bank money in the mar­ket and whether it’s gold, bonds or stocks, we have to learn what might do well in the near fu­ture.

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