How to keep the virus away from your investment portfolio?
By Schroders
The outbreak of the COVID-19 has not only triggered concerns on health, but also the investment markets as investors continue to assess its impact on the Chinese and the global economy.
While the situation remains fluid and there are still a lot of unknowns, we try to provide some insights based on what we have observed in the market, as well as a few hygiene tips which could help prevent the virus from infecting your investment portfolio.
“When China sneezes, the world catches a cold?”
We have seen many analyses trying to compare the current COVID-19 outbreak to the experience of SARS in 2003. While we agree that there are some parallels between the two periods, we should also acknowledge how much the world has changed since then, in particular the much higher importance of the Chinese economy to the world.
First of all, at the time of the SARS outbreak in 2003, China made up 4% of the global economy, and contributed 14% to the world GDP growth. By 2018, its share of the world GDP had risen to 16%, with 35% of global growth coming from China. What’s more, back in 2003, the Chinese economy was growing at 10% p.a. (compared to 6% p.a. now). The increased importance of China and the softer growth means that any hiccups to the country’s economic growth is likely to have a much bigger impact on the rest of the world.
Another important difference between now and 2003 is the integration of China into the global supply chain. In 2003, China accounted for just about 5% of global exports. However, it has grown to 13% in year 2018, with some sectors (such as office and telecom equipment) accounting for almost one-third of all global trade. With China being much more integrated into the global supply chain, the impact on global trade as well as manufacturing activities are likely be felt much stronger than before should the shutdown of cities and factories last longer. It is difficult to tell exactly how much the impact will be at the moment, and probably it would only be known in the next few months when companies and analysts start incorporating the effect into earnings forecasts. We believe that the impact of the current outbreak on the global economy is likely to be stronger than that of SARS in 2003, and some of the effects (e.g. supply chain disruption) would only be known at a later stage. All these are likely to cause some delays in global recovery. However, we do not expect this to derail the global economy, especially when global central banks continue to be accommodative.
How to keep your investment portfolio healthy?
Many of the hygiene tips for staying healthy and keeping COVID-19 away from us also apply to investments. Below, we try to explain how they work and what strategy you may follow to help your portfolio to stay healthy.
Everyone knows that having a balanced diet is one of the best ways to keep your body healthy. The idea is to provide your body with the right mix of nutrients for it to grow, repair and function well. The same can be done to your investment portfolio by trying to blend the right mix of asset classes, such as equities and bonds, to provide enough return drivers and diversification so that it can grow and function well over the market cycle.
Needless to say, the quality of the food you eat is going to have a big impact on your body. If the food is of low quality, no matter how balanced your diet is, your health could be compromised. By the same token, quality of the securities in your portfolio can substantially impact its health condition. Amid the current environment of ample liquidity, focusing on high quality securities which pay sustainable dividends & coupons, supported by healthy cash-flows is a good way of keeping your portfolio healthy.
We know that avoiding the crowd is important for us to reduce the chances of catching the virus, and we could do the same to our investments. Often, we can see herding behavior in times of stress in financial markets. Taking what we saw from the market over the last few weeks as an example, some knee-jerk reactions of significant sell-off happened in certain sectors such as consumptions, while share prices of companies which are believed to be benefitting from this event, such as some pharmaceutical companies, have rallied strongly. These “crowding” or “herding” behavior tends to be short-lived, and would ultimately reverse itself as reality sets in. As such, rather than chasing the crowd and trying to be part of the herd, which could potentially “infect” your portfolio with poor performance, the wise response to these market volatilities is to focus on long-term outcomes, and ensure your portfolio has some investments which are more resilient, to smooth out the volatility.
Since a few weeks ago, a facemask has become essential when we go out. The facemask is like a “shield” against COVID-19. In your investment portfolio, there are also risk management techniques that are very much like a facemask in real-life that we can deploy in fighting against market volatility. For example, reducing currencies with high risks (such as Asian currencies) and replacing that with perceived “safe-haven” currencies (such as US dollar or Japanese Yen) is one of such “facemasks” in the investment world.
In addition, exercising regularly and staying active is also part of a healthy lifestyle, which also applies to your portfolio. Rather than being dormant and static, actively managing the asset allocation and exposures in your portfolio is important to ensure that your investment portfolio remains fit for the current environment.
Conclusion
The outbreak of COVID-19 does not just bring risk to people’s health, but also to your investment portfolios. The good news is that we know the ways that can help reduce the chance of catching the virus, such as keeping a well-balanced diet, avoiding crowds, wearing a facemask and exercising regularly. All these principles would also be applicable to your investments. By staying active in asset allocation decisions as well as focusing on high quality companies and downside risk management, a well-balanced multi-asset portfolio can be resilient during volatile periods, and also an easy way for you to keep the virus away from your investment portfolio.
Please study fund features, performance, and risk before investing.
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