As a veteran financial adviser, people have often asked me how investors should have positioned for the pandemic. In answer, I say that not only could they have not, they really should have not either. This novel coronavirus is, well, completely new, and it is easy to see how a portfolio strategy aimed at tackling its risks could have entailed foregone returns of equal magnitude in normal times. We aren’t in the business of crystal ball gazing to divine black swan events.
What we are in the business of, however, is knowing that events like these come around every decade or so, like the global financial crisis or the dot com one before that. Ensuring that clients are prepared to put panic aside and have adequate cash buffers on hand to be able to ride out the storm is where our focus should lie.
The year has been an object lesson that liquidity and time horizon are all when it comes to investing. Markets have been on a real rollercoaster and those that have had to sell during low points to meet their liabilities will have often had the unpleasant experience of watching those investments subsequently bounce strongly back.
Selling low is of course the ultimate mistake, and it’s bad enough when that is a forced error. However, many people also locked in completely unnecessary losses completely of their own volition by converting “paper” losses into actual ones when panic-stricken markets hit their lows. Logic, or a seasoned professional’s advice, would have told them that the stock prices of perfectly healthy companies were going down with the rest and that should markets subsequently soar we would look back on this as a buying opportunity. And so it proved.
Rules bent and broken
The generalised tumble in asset prices in the dark days of the crisis also underscored how rules are meant to be bent, if not outright broken. Time-honoured wisdom sets the standard portfolio’s asset allocation at 60 per cent stocks and 40 per cent bonds, the former generating greater potential for returns, the latter acting as ballast, and both moving in an uncorrelated fashion. Yet March’s simultaneous falls proved equities and bonds are sometimes only too positively correlated. Lest we forget, this was also the year that the oil price went negative for the first time in history. The world certainly was turned upside-down in 2020!
Although our investment precepts were shaken by the year’s events, we also saw them borne back out. Fixed income did have its status as a safety valve in rocky times shaken, but research still shows that a portfolio allocated 60-40 to the S&P 500 and Bloomberg Barclays US Treasury Index would have still posted returns of almost 10per cent through the crisis, as it has done every year since the 1980s[i]. This rule may be down, but it is definitely not out if we take a slightly longer view.
What has changed things irreversibly I think are all of the runoff implications from the pandemic. As with all crises, some companies and asset classes have had a fantastic time. Cryptocurrencies and gold have benefited powerfully from the search for inflation-proof safe havens in alternatives, for instance, then there have been stellar performances from stocks in the streaming, video conferencing and online shopping sectors and more.
There have been lots of opportunities to make impressive returns during this strangest of years, if you’ve been able to forecast the weather accurately and be nimble in realigning your holdings to new realities.
A greener, more digital future
One of the biggest of these has been how Environmental, Social and Governance (ESG) investing has rocketed up the agenda as the interconnectedness of the world has come into sharper focus. The green targets countries have embedded in their “build back better” programmes will ensure this is a trend that isn’t going away.
In fact, prevailing investment wisdom is that we need to urgently pivot towards a more environmentally friendly, more digital and potentially in some ways more localised future. As well as the more obvious plays on these megatrends you then might look at more nuanced ones, like domestic tourism. Those who didn’t move to take advantage of oversold markets are going to have to work hard to find pockets of value now.
They do exist in abundance, however, in my view. While the pandemic battle is far from over, vaccine breakthroughs are showing a way through and thoughts are already turning to recovery and renewal. Big changes are afoot the world over, and with them will come big opportunities for investors to help fuel – and of course profit from – a future which is coming up fast.
As a leader in technology and manufacturing, I believe Việt Nam is particularly well placed to boom, particularly given we can look forward to enhanced trading partnerships with many nations and potentially warmer relations with the US too. There has been much talk of the potential for our own version of the “roaring twenties” and in Việt Nam’s case at least I can really see that taking shape. Here’s to a much improved year ahead!
* Brian Spence is managing partner of S&P Investments. He has more than 35 years of experience in the UK financial services industry as an investment manager, financial planner and M&A specialist. He is a regular contributor to the UK financial press and has a deep understanding of the financial services community. Brian’s column will reflect on all the challenges and opportunities within the Vietnamese market, bringing a fresh perspective to today’s hottest issues. The columnist’s email address is firstname.lastname@example.org.