Three months ago, investors were looking forward to an improved year of global growth and corporate earnings. That was then. The coronavirus crisis is an era-defining event; one which will have a significant impact on not only how we live, but also where we invest.
This is according to James Klempster, Director for Investment Management at Momentum Global Investment Management, who notes that COVID-19 has delivered an economic shock with a speed and severity unprecedented in modern times.
“These are the most challenging conditions that many, probably most, of us have experienced in our working lives. In aggregate, the world has never been richer, we enjoy the most sophisticated technology and healthcare of any generation; yet we have been laid low by a pandemic which has required a return to the most basic solution: stay at home.”
There is no question that deep-seated, long-lasting changes are on the way, with important implications for investors. But Klempster points out that capital markets will begin to discount the recovery, along with the winners and losers, well ahead of the end of the humanitarian crisis. The question front-of-mind for many investors, however, is what course of action to take in these unprecedented times.
“From an investment perspective, the first thing is that we have to look past the headlines,” says Klempster. “We don’t invest in asset classes – particularly equities – for the short term, and as disruptive as this virus is, it is not unpicking the very fabric of financial markets.”
Governments around the world have been swift to act, pledging unprecedented support for businesses and individuals to tide them over during this period of reduced economic activity. Central banks have also been active, with the Fed cutting interest rates to historic lows, while restarting its quantitative easing programme. Such action should support stock market valuations and encourage investors to buy yielding assets such as equities and bonds.
According to Klempster, these interventions removed the risk of the deep recession triggering a systemic financial crisis and ultimately a depression. Furthermore, the financial system is better placed to weather this storm: “Importantly, the vast majority of banks worldwide have substantially stronger capital positions than in 2007/8 when the global financial crisis hit,” he says.
The unprecedented injection of liquidity has resulted in global equity markets being up more than 20% from their bottom on 23 March – which puts the US, for example, technically back in bull market territory. Klempster however cautions that one should not get too excited just yet.
“What is clear is that uncertainties and risks remain extremely high. We can, however, be certain of two things: recovery will come, and markets have already discounted a great deal of bad news. We cannot predict with confidence when the bear market will bottom, but the extraordinary levels of support provided by central banks and governments will ensure that economies are largely intact as we exit the crisis - the seeds of a recovery have been sown.”
Looking ahead, the question remains what this means for investors. “From a macro perspective, low interest rates are here to stay for a long time in what will be volatile markets,” says Klempster.
“Security of supply chains will surely play a greater role in sourcing arrangements than in recent decades. Production of vital goods and services is likely to be brought home wherever possible, lessening the reliance of countries on China.
“It is likely that some industries will be permanently damaged by the crisis and some companies will not survive. Travel, tourism, airlines and leisure spring to mind, but there will be others. Other industries such as online retailers, gaming, education and conferencing, video streaming, health and tech, in turn, could emerge as long-term winners from this crisis.”
Thinking locally, Klempster notes that South African investors must consider diversifying their portfolios offshore as a point of departure. “There are a number of great companies in South Africa, but the market is concentrated. Why limit yourself to a country that represents less than 1% of global GDP? Investing only in South Africa means you are missing out on 99% of the opportunity.
“We recognise the great uncertainty and risks that lie ahead, and we do not profess to have all the answers – no-one does. However, with zero interest rates and low inflation, the medium term is likely to be a good period for risk assets.
“We don’t expect big returns, but positive and gradually recovering the losses inflicted in recent weeks. The recovery will come, and by staying invested, with the adjustments we have made to portfolios, we will be positioned to weather any further storm ahead and participate fully in the upswing in markets when it arrives,” Klempster concludes.