In the wake of the extreme market volatility triggered by the Covid-19 pandemic, investors must look beyond the crisis for the much-needed clarity they seek for their portfolios. Markets can be volatile in the short-term, but they tend to favour patient investors looking for long-term growth. Through thirty years and multiple crises such as the tech bubble of 2000, sub-prime mortgages in 2008, and the European debt in 2010, global equity markets (as represented by MSCI ACWI) has seen a cumulative return of over 730%.
As healthcare, economic, political and social tensions continue to unsettle everyone, there are two complementary approaches that investors can apply to their portfolios to build resilience. First is a defensive approach that can help reduce the impact of down markets while looking to capture some of the growth potential offered by investing. At the same time, investors need to ensure they are ready to seize opportunities in the market when they arise. As disruptive as the current situation is for markets, it is also generating opportunities, such as the acceleration in scientific research, telemedicine and our digitalisation.
Protect, Diversify and Cushion
Markets can be volatile in the short-term, but they tend to favour patient investors looking for long-term growth. Opportunities for market gains may come in the potential market recovery and could become a missed opportunity if investors jump out of the market to limit short-term losses. So it is important to stay invested, but adjust your portfolio accordingly to guard against market fluctuations.
Three components to this approach:
Protect |
• Find refuge against broad-based market risks in safe-haven currencies that have traditionally behaved well in periods of heightened volatility.
• Maintain portfolio liquidity to quickly pursue opportunities as they arise. |
Diversify1 |
• Reallocate capital and invest in a wider variety of assets to reduce a portfolio’s exposure to risk.
• Look for truly diversified investments, such as hedge strategies, to protect the portfolio during volatile times. • Focus on building a portfolio of uncorrelated risk assets. |
Cushion |
• Regular income from investments can act as a cushion for investors when markets fall.
• Look for income opportunities in select emerging markets, where yields are higher and capital growth is stronger. |
Be opportunistic and adaptive
Despite a gloomy economic outlook, investors must remember that there is opportunity in market volatility. Several trends that were brewing in the pre-pandemic world seem stronger and more likely to flourish in today’s new environment. We zoom in to two themes that we see have the potential to drive future performance: technology and emerging markets.
Technology |
• Themes spurred by innovation and technology such as artificial intelligence, cloud computing, and e-commerce, are likely to drive transformation in various ways across multiple sectors over the coming years and are likely to also be building blocks of resilience for portfolios.
• Technology today already dominates much of both the global economy with seven out of ten largest companies by market capitalisation being tech companies2 • Adoption of digital transformation tools has been accelerated by the coronavirus crisis. • Healthcare demand and biotechnology innovation will be the beneficiaries of an ageing global population. |
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Emerging Markets |
• Technology, demographics and intra-regional cooperation have transformed emerging markets into a global powerhouse.
• Longer term themes that have driven growth for decades will persist in emerging markets, such as urbanisation and consumption upgrades that benefit small capitalisation companies • While China’s economic data will likely remain weak for some time, we believe the long-term growth outlook will remain strong due to strong governance through resolute policymaking, which has led to relative resilience. |
In Summary
Staying invested and riding out volatility is how investors can unlock the potential of long-term gains. As such, the focus of investors should be on funds that include sectors that offer strong competitive advantages, fuelled by companies with robust balance sheets and healthy free cash flows. This indicates an ability to weather the economic downturn and volatility over the near term and a strong likelihood of being able to stay on track for opportunities that may come in the potential market recovery.
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1. Diversification does not guarantee investment returns and does not eliminate the risk of loss
2. Source: Bloomberg, as of April 2020
