A fluid risk landscape

But the key for investors remains diversification, writes

he response to the Covid-19 pandemic has been anything but uniform as countries implemented different lockdown measures.

Economic support measures also differed. The robust and expedient response from numerous central banks, which loosened fiscal purse strings and committed to spending as

Tneeded to protect economies and businesses, helped various nations contain the fallout.

“It was unprecedented for central banks and governments to step into the void so promptly with relief measures,” says James Twidale, CEO of Stonewood Asset Management. “This broader approach includes various stimulus packages via monetary and fiscal policies. The concern is that many reserve banks have become a lender of last resort. And by buying debt and equities, they become a safety net for a fiat monetary system, which skews risk and reward variables,” he says.

While there are no guarantees that these measures can save everyone, John Wynevans, head of investment strategy at Investec Wealth & Investment UK, believes that economies that implemented these measures will be more resilient. “They are likely to emerge with the potential for faster recoveries once they fully reopen.”

Investors should also consider the first-in, first-out trend, as countries like China, South Korea and various European nations ramp up economic activity. However, the threat of a second infection wave persists. Global investors must, therefore, navigate a fluid risk landscape when selecting geographies to invest in.

“Unexpected increases in infection rates or extended lockdowns will … drive market dynamics in the short term,” says Ryan Basdeo, portfolio manager at 1nvest. “Over the medium to long term, investors should monitor regions that weather the storm better than others based on aggressive support measures, which should provide a platform for future growth.”

Additional factors will also determine where an investor can generate returns. The pace and scale at which economies

reopen, the sustainability and effectiveness of containment measures and the structural strength of the economy before the crisis hit will all influence return profiles.

Holly Lobprise, senior research analyst at Cinnabar Investment Management, says the expectation was that global markets would deliver low growth, even before the Covid19 pandemic hit.

“One could argue that with the rerating experienced by markets over the past few months, potential growth prospects across markets look better than before.”

The US market looks the most interesting based on the stimulus injected, she says.

Wyn-evans cautions against an aggressive approach to regional investments, but believes the US market is better placed than most other developed markets for the post-covid world.

“Our preference for longterm investments remains best-in-class companies. We have selectively increased our US equity weighting owing to the country’s focus on domestic job creation combined with aggressive fiscal and monetary stimulus, which creates growth potential.”

While US debt levels will rise, Wyn-evans suggests these won’t exceed those of other developed nations. “The US economy is not a bad place to be going forward.”

Twidale holds a different view. “With the biggest central bank in the world effectively playing the role of an insurance company, printing money to buy debt and equity, and propping up the US energy sector, we believe that valuations may be more skewed in the US than elsewhere.”

For example, developed markets outside the US have been more attractively priced on aggregate for a while now. “If you assume they have moved in lockstep with US markets, or performed worse, then you could argue that they look more attractive than the US on a relative basis postcovid-19,” says Twidale.

He also believes that US equities could be overvalued. “Therefore, in relation to the all country world index global equity benchmark, we are tilting to Europe and other developed markets outside the US … and select emerging markets.”

While emerging markets don’t generally deliver good returns in “risk-off” environments, certain Asian markets are benefiting from the first-in, first-out effect.

“China indices are already slightly up on the year. And the country hasn’t released its full potential stimulus package yet. We therefore maintain our emerging-market preference for China,” says Wyn-evans.

As market stability and investor confidence return, more money will flow back into emerging markets.

But when will markets switch back to “risk-on” sentiment?

“Not in the very near term,” says Lobprise. “But positioning your long-term portfolio with allocations to emerging and developed markets will provide diversification.”