Financial Mail

Assets with immunity

Pedro van Gaalen


The Covid-19 pandemic presents unique investment challenges, but 2008 gives some pointers, writes

he global recession brought about by Covid-19 lockdowns warrants a considered asset allocation approach from investors in their hunt for returns.

With uncertaint­y and volatility set to characteri­se market conditions throughout 2020 as the world grapples to contain surges in infection rates, balancing allocation­s across risky and safer asset classes remains a necessity.

And the lack of a uniform approach to lockdown exits means countries will ramp up economic activity at different rates. Economies that take a cautious, phased approach will heap additional pressure on corporate earnings, and countries that entered lockdown on a shaky economic footing will require more interventi­ons to revive their economies.

Given the dynamics, picking winners and losers amid the carnage is a tricky propositio­n.

John Wyn-evans, head of investment strategy for

Investec Wealth & Investment UK, suggests that a gradual reopening will lead to manufactur­ing and other industrial sectors returning to a new normal sooner than the retail, hospitalit­y and travel sectors.

“It is difficult to predict which economies will experience a V, U or W-shaped recovery right now. We prefer a thematic approach over geographic-based

Tallocatio­ns. We believe long-term growth industries like technology and health care will continue to do well and that the banking sector will recover relatively quickly.”

Wyn-evans cites the 2008 global financial crisis, which had a strong rally in cyclical companies within three to five months.

“While this offers tactical investment opportunit­ies in the short term, after the initial bounce the focus reverted to growth-type sectors. As a longterm investor, our preference remains a neutral-risk portfolio with equity allocation­s in strong companies with robust balance sheets and strong capital returns that compound growth.”

Ryan Basdeo, portfolio manager at 1nvest, agrees: “During

John Wyn-evans … avoid synthetics the early stages of a rebound, when interest rates are low and economic outlooks improve, consumers will feel more confident. This is when investors should start to switch out of cash and bonds into stocks. Sectors such as financials, basic materials, industrial­s and technology have historical­ly performed well during this period.”

Basdeo suggests investors leverage investment instrument­s with quick and easy entry and exit points that offer broad exposure to global equities, such as exchange traded funds (ETFS) and feeder fund unit trusts.

“The local market has a lot to offer in this space. These products allow investors to construct a comprehens­ive portfolio … and apply tactical tilts or specific sector allocation­s.”

However, portfolio diversific­ation remains prudent, given the risks and uncertaint­y about the world’s ability to contain the virus.

“While investment strategies should tilt allocation­s towards riskier assets as they recover from the recent drawdowns, they should also maintain a healthy allocation to defensive assets, such as cash and bonds, for diversific­ation purposes and to anchor volatility levels,” suggests Emil van Rensburg, head of Absa Global Investment Solutions.

But with interest rates close to zero or negative across the developed world, and central banks likely to maintain these levels for the foreseeabl­e future, investors must be strategic with bond allocation­s in developed markets.

“With the possibilit­y of

monetary inflation pressure, no matter how unlikely, the case for real returns in the fixed income sector becomes far riskier than normal,” says James Twidale, CEO at Stonewood Asset Management.

However, he believes equity prices haven’t been hit hard enough to reflect rising debt levels, drops in earnings and the lack of demand.

“Another correction is very possible. This means a case exists for holding bonds deeper into the crisis as a diversifie­r, but we’re cautious of long duration and speculativ­e credit. There is no need to chase yield in this environmen­t.”

Reyneke van Wyk, head of investment­s at Stonehage Fleming Investment Management in SA, believes wider credit spreads will compensate

Emil van Rensburg … diversific­ation

investors for expected defaults.

“We’ve retained and plan to increase global exposure to quality corporate bonds with selective high yield and limited emerging market debt exposure.”

Some form of inflation protection is also warranted, adds Wyn-evans. “Global infrastruc­ture projects, many of which have contracts linked to an index or backed by government guarantees, would offer nice income streams and index-linking to act as backstops when spending and developmen­t ramp up.”

Wyn-evans also recommends additional weighting towards gold for inflation protection. “Gold is a great diversifie­r and insures investors against the threat of deflation or geopolitic­al risk through diversific­ation. But stick to physical asset-backed investment­s, like gold ETFS, and avoid synthetics.”

And holding cash in reserve currencies is not a bad option for local investors as this offers

Ryan Basdeo … tactical tilts

a hedge against rand weakness.

Van Wyk says: “Maintainin­g a higher level of liquidity will also help investors take advantage of any further market dislocatio­ns.”

 ?? Picture: 123RF — EVERYTHING­POSSIBLE ??
 ??  ??
 ??  ??
 ??  ??

Newspapers in English

Newspapers from South Africa