Rewriting investment rules
Times are uncertain because of a lack of precedent, writes
The Covid-19 outbreak sent global markets into free fall. “The pandemic led to a virulent market sell-off, with risky assets losing 30% of their value within 25 days,” says Ndabe Mkhize, chief investment officer at the Eskom Pension & Provident Fund.
Asset managers must now claw back losses and exploit opportunities amid the threat of new infection waves, which could scupper economic recoveries.
Sonja Saunderson, chief investment officer at Momentum Investments, says: “Markets will continue to react to short-term news and sentiment until there is a clearer view of Covid-19’s impact. Major economies must demonstrate they have mitigated the worst in terms of infection rates and deaths, and signs must emerge that economies are recovering or are on a path to recovery.”
St John Bunkell, head of Absa Alternative Asset Management, says: “Unfolding factors driven by the … pandemic, including its significant knockon effects and impact on the global economy, will ultimately determine the recovery. The future is uncertain as there is little precedent in modern times. Asset managers must focus on risk management principles, given the current heightened levels of volatility.”
Milton Osborn, director at CMS RM Partners, says an
Ndabe Mkhize … asset classes
asset manager’s response will be driven by their mandate while ensuring duty of care in managing clients’ interests and investor risk to preserve capital. “Asset managers will be evaluating the crisis, assessing government stimulus packages and economic data to decide where and when to invest — an unenviable position because, above all, they won’t want to lose more investor money.”
Lebo Thubisi, head of manager research at Alexander Forbes Investments, says Covid-19 was the trigger that took the global economy and financial markets into a correction period, which asset managers had warned was coming for some time.
“And when markets correct, the long-term return outlook improves dramatically. This is an encouraging ‘silver lining’ perspective that asset managers can share with clients.”
Saunderson says emerging opportunities will unlock returns over the long term. “This represents a good buying opportunity for portfolio managers and investors with a longer horizon.”
However, Thubisi says a better long-term return outlook doesn’t eliminate the possibility of further short-term pain.
“Long-term expectations play out over long periods, not the short term. Managers are adjusting portfolios to take advantage of opportunities in financial markets but not going gung-ho into risk just because of cheaper valuations. Often, there is a good reason for cheap valuations, and we might require more clarity within a sector before seizing that specific opportunity.”
A major concern is the likelihood of a potentially extreme liquidity crisis, adds Bunkell.
“The severity of this potential crisis is unknown and difficult to predict. Illiquidity will likely lead to unnecessary insolvencies, credit defaults, a significant rise in unemployment and a severe contraction in GDP across the world. This cannot be good for corporate earnings and, therefore, equities and numerous other asset classes, most notably credit.”
In response, asset managers will need to use the chance to position their investment calls for recovery in a cautious manner, believes Saunderson.
Sonja Saunderson … opportunities
“The best defence against further market turmoil is sensibly spreading risk between risky and defensive asset classes. Our portfolios are well diversified across several asset classes, which is an approach we will maintain. We have also implemented protection strategies to mitigate against additional downside risk.”
Thubisi believes global equity is attractive, but cyclical pressures exist.
“Uncertainty remains around the ultimate extent of supply chain and global trade disruptions, and tourism patterns. Earnings from global companies will likely remain under pressure in the short to medium term.”
However, regulated limits to offshore exposure for pension funds will limit this hedge against local risk factors.
“Managers will need to invest in asset classes that will perform comparatively better in a recessionary environment over the next two to five years,” adds Mkhize. “Pension funds with real liabilities will find risk-free assets attractive at this stage, notwithstanding SA’S credit downgrade. Private market strategies will play a meaningful role in generating longterm alpha relative to their public markets equivalents.”
Osborn believes hedge funds and other managers with less regulation will be chasing short-term opportunities and making more aggressive calls.
“We are in new territory, with no precedent for asset managers to look to, to understand this crisis. While the pandemic is rewriting investment history, bold asset managers will look for opportunities, but with no playbook to follow, it is fraught with risk.”