SINGAPORE (Apr 9): Investors come in different shapes and sizes but right now they all have one thing in common — fear. The global stock market is down about 30% for 2020. The question of whether US stocks can sustain their decade-long bull run has been answered with a resounding ‘no’. While few would have predicted that a global pandemic would trigger the free-fall, the US is now formally in bear-market territory, having fallen over 28% from its peak in February this year.
The sell-off has been indiscriminate across most markets globally, even for traditionally defensive sectors like healthcare or utilities. On the flipside, any government bond that is considered remotely safe has been in high demand. The US Treasury bond yields have also reached new troughs before rebounding. Witness the proverbial ‘flight to safety’ but as financial markets are delicately balanced — which way will they tip?
Imagine the current volatility as a weighing scale. On one side are investors, fearful of how much worse the Covid-19 pandemic will transpire. On the other side are global authorities who have not held back on taking measures — border controls to limit viral spread, monetary stimulus to lower the cost of corporate debt and fiscal stimulus to support vulnerable consumers and businesses. The US Fed has led by cutting interest rates to zero, the European Central Bank has increased quantitative easing and about 30 central banks have followed rate cuts. Attention is now focused on how much fiscal stimulus governments globally will inject.
Investors are eagerly processing each piece of information as the economic damage turns more severe than initially expected. When the implications are unclear, they may well feel that the only safe option is to sell now and figure it all out later. It is no surprise that markets will remain choppy and volatile in the near term.
Four themes to guide investors
Investors should take a breath and don’t panic. Selling all, or a substantial chunk, of their equities may not be the best thing for investors to do now – especially if they’ve already suffered significant losses. In volatile times, market movements (up or down) tend to be larger than normal. So, if you’ve cashed out, you could risk missing out on big recoveries. In fact, according to data from 2004 to 2014, portfolios that missed out on the top 20 performing days during this period would have significantly underperformed. Where ‘timing the market’ is notoriously difficult, investors should focus on ‘time in the market’.
Investors should also prepare for volatility over the coming months. The economic outlook is expected to remain uncertain, with seesawing markets and persistent volatility. Corporate earnings are expected to deteriorate significantly, particularly in developed markets. Global equities could be an attractive investment to consider over the long-term but caution is warranted for now. With yields on government bonds now even lower, the excess yield available on investment grade corporate bonds could look more attractive. Corporate bond prices are also reflecting some of the risks of a global recession, as well as deterioration in corporate earnings. Core government bonds which tend to form a part of diversified portfolios, have traditionally performed well during volatile times and their yields are now at an unprecedented low. It’s vital that you take steps to optimise your portfolio, while ensuring the right level of exposure for your risk tolerance. For some investors, this could mean including high quality bonds and viewing these allocations as a form of short-term portfolio insurance.
In the meantime, look for ‘smart diversifiers’. Since traditional safe-haven assets tend to be expensive, there may be no cheap or easy place to hide. As mentioned, investment grade corporate bonds are a possible alternative but since these bonds are issued by companies and not governments, they traditionally have a higher correlation with the stock market. Because of this, investors may wish to consider additional ways of diversifying. Alternative investment strategies aim to deliver absolute returns uncorrelated to market conditions. Gold is another asset that traditionally performs well during volatility. Although prices recently reached a seven-year peak, it may still be a useful store of value at times like these and prices may be supported by even lower interest rates and continued short-term volatility. If neither of these approaches are readily available, contemplate a more traditional multi-asset portfolio approach, where investment decisions are made by professionals against your risk target.
Finally, consider opportunities for the long-term. With uncertainty comes opportunity. This matters to investors because relatively cheaper entry points to global equity markets now exist, making them potentially more attractive for investors with a longerterm time horizon. Remember, it is difficult to time the market and call the absolute bottom so pore over the potential opportunities. Emerging market (EM) equities, particularly in Asia could be an attractive investment to consider from a long-term perspective. EM has more scope for policy action than the Eurozone and Japan, as we’ve already seen authorities in mainland China and other Asian markets take aggressive fiscal and monetary action to support the economy. Lower energy prices should also help EM markets that are ‘non-petroleum’ economies.
Asia was forced to confront the Covid-19 outbreak a few months before the rest of the world, so it is arguably closer to returning to some semblance of normal life as infection rates appear under control. This could be positive for Asian economies and — correspondingly — for EM and Asian investments over the longer term.
Ian Yim is the head of wealth and international at HSBC Bank Singapore
