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Crystal Wealth Newsroom

COVID-19: global markets update

Investments

Recovery curve starting to draw out
As discussed in our last look at the markets’ response to COVID-19, we envisaged more of a slow, U-shaped economic recovery, rather than a sharper V-shape many, including the government, were hoping for – and we believe the probabilities are still weighted there. While the market response has been more ‘V-shaped’ to date, the current resurgence of COVID cases means it’s looking more likely that we will face a longer, drawn-out recovery with many ebbs and flows as the news flow changes.

While a lot of businesses around the world have opened up again – for example, a lot of China’s production is back online again supporting our export sector (particularly iron ore) – they can’t fully re-open without the associated health risks emerging, hence potentially a longer recovery window.

That longer economic recovery then underpins your government and central bank policy action: ongoing financial market support, asset buying, low interest rates and low inflation. And while there remains sensationalism in the media over the various economic figures mentioned in recent government updates, there was always going to be record spending right now and hence we should expect record deficits here, and elsewhere in response.

Pragmatic approach needed
Overall, from a portfolio perspective, it’s been important to not overreact to the current situation which, as much as the word has been overused, has been unprecedented.

Within our investment committee, we’ve had countless conversations about the best structural approach to manage client portfolios in this tremendously uncertain environment. The wide range of possible outcomes means that with cash at zero, multi-asset portfolios should aim for a healthy participation in any optimistic recovery picture while remaining resilient in the face of a slower and more volatile outcome. This leads inevitably to conversations about taking some profits as sectors or assets start to run or building more downside protection into portfolios or more attractive entry points for new positions. The current market environment is not likely to change anytime soon, leading to many more of those type of conversations. It’s more dynamic and likely to be more volatile as the tussle continues between the pathway of the pandemic and its consequences and the degree of policy response.

We’re continually monitoring and analysing the current situation to try and achieve the best outcomes for client portfolios under these changing scenarios. This is not the same as a ‘market timing’ approach – we believe it’s a flawed strategy in our view, even more so today – as we are focused on building robust portfolios that can respond to different stress tests and uneven economic outcomes.

True diversification more important than ever
Diversification has always been an essential factor within a structured wealth management strategy. When dealing with such a changing environment that’s being affected by factors largely outside anyone’s control, it’s even more so.

However, the diversification we’re talking about now is different from the diversification when valuations were ‘more normal’. Rather than simply looking to say balance bonds and equities depending on market conditions, you now need a more diversified set of tools in your portfolio. You will still need bonds. But you will also need a range of more risk-based credit investments. You need physical assets (such as gold). You need property assets – listed and unlisted. You need things that have currency exposure, things that are hedging out currency exposure and sometimes alternative asset hedges. In short, you will need to use a wide array of assets that can perform in different ways to each other – to give you some upside and downside protection, limiting portfolio volatility.

As we all know, one of the current problems in portfolio design currently is the lack of true low-risk assets that also pay any reasonable level of income. This is no accident. Government policy action in dealing with COVID-19 has accelerated the trend already in place to curb interest rates and ensure plenty of financial liquidity or support in asset markets. It means those simple government-backed, safe investments that generate a bit of income just aren’t the same right now. So the most sensible alternative approach is to diversify across multiple areas, with multiple assets so the portfolio can respond to different scenario outcomes. Remember the behaviour of economies does not necessarily determine the behaviour of investment markets and we are seeing plenty of evidence of that at work today. The need to be opportunistic with investment decisions moving forward will increase.

Doomsday scenario averted
Back in March, people saw the impact of this pandemic on the global economy, and quite rightly there was a huge concern everywhere. However, while a little slow off the mark, it seems that for now, the huge policy response from March onwards has averted a doomsday scenario.

That doesn’t mean to say, however, that we’ll be back to a normalised economic operating environment soon. The virus and potential second wave risks are real and as a global society, we’re still working out which businesses are going to survive and in what format. Some companies that were already down a path of digitisation or operating in the tech space have done very well, and will probably continue to do so. Others are still working through their business model and the changes they need to make to adapt. Others regretfully will just fail and never re-emerge from the current ‘life support’ status of government welfare.

Close and continual analysis of the sectors and underlying operating dynamics remains key. As we enter the reporting season, we’ll start to get an insight into how businesses have been coping and performing and any future trends emerging.

There’s still a lot of negative news around, of course as we brace for a potentially slow and long climb back. However, this needs balancing with how the markets have moved – and that provides some idea of what’s possible on the reverse with supportive monetary conditions. Just imagine what could happen with news of some positive outcome with a vaccine?

Food for thought.

If you’d like to discuss how the market is performing, and what that means for your investments, please contact the team here at Crystal Wealth, who’ll be delighted to help.

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