Investors have to balance the support from central bank and government stimulus against economic headwinds, as well as the uncertainties over the speed and strength of recovery after the containment of the Covid-19 pandemic.
Recovery is also likely to be uneven across sectors, as fear of infection could continue to alter consumer behaviour. Many businesses will struggle, and some will close.
However, as Adrian Zuercher, head of asset allocation in Apac for UBS Global Wealth Management’s chief investment office points out, during extreme market stress and volatility, correlations for different conventional asset classes tend to converge to one, at least temporarily.
This leads to larger drawdowns in portfolios, causing risk aversion among investors.
“[But], there are many strategies that could mitigate the portfolio’s downside exposure if used to replace a part of the [conventional] equity allocation,” he said.
For instance, there are private equity opportunities in sectors underrepresented in public markets, and he expects investors would be compensated with additional returns due to active ownership, complexity, and illiquidity.
Flexible strategies
Investors should also consider hedge funds with dynamic allocation strategies which can generate alpha by changing asset class exposure depending on the market environment, or structured notes that accept limited upside in return for explicit downside protection, Zuercher argues.
Moreover, volatility in the market and dispersion between winners and losers create “a great trading environment for hedge funds because it enables the managers to express their views in both long and short positions”, said Stephen Pak, Asia-Pacific hedge fund specialist at Citi Private Bank.
He identifies price dislocations within the healthcare and technology equity sectors, as well as in emerging market debt and structured credit as opportunities for hedge funds to exploit.
“Having policy support is both a blessing and a curse: it is good because central banks provide a backstop for asset prices, but they also distort true value. Hence, you want to be flexible and act opportunistically” he said.
Meanwhile, Pak’s colleague, Audrey Mak, who is an Asia- Pacific private equity and real estate specialist at Citi PB, sees private equity credit opportunities in stressed and distressed companies stemming from individual corporate funding pressures, industry challenges and secular shifts in demand.
Gold bugs
Of course, there is a traditional safe haven during times of extreme market stress: gold.
Gold’s uncorrelated performance with bonds and equities makes it a perfect hedge for rising economic uncertainties, negative interest rates and the strong dollar, according to Hou Wey Fook, chief investment officer at DBS Bank.
The yellow metal has “outperformed major currencies historically, and in a low interest rate environment where carry cost is close to zero, it makes sense to hold gold as a risk diversifier in a portfolio”, he said.
Jason Liu, head of the chief investment office for emerging markets at Deutsche Bank Wealth Management, agrees that gold “looks to be supported in the current low interest rate environment as it reduces the opportunity cost for holding gold”.
The current outlook could be similar to the trend in gold prices during the global financial crisis when prices fell for much of 2008, but then rallied strongly in subsequent years.
A third voice in the gold bug chorus, that of Patrick Ho, chief market strategist for North Asia at HSBC Private Banking, insists that “resilient portfolios in these uncertain times should include gold (as well as hedge funds) to counterbalance high equity and credit market volatility”.
Clearly, the discipline of multi-asset investing and seeking diversification remains paramount and could serve investors well.
