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Source: Momentum/Harmony fund managers
1. Coronavirus will pass, whereas fiscal and monetary stimulus will be long-lasting.
Bond yields are likely to remain low for many years from now, with base rates at all time lows. Governments worldwide are increasing expenditure to extreme levels that have historically only occurred at times of war, representing 10% of GDP in the US and as much as 20% in the UK, with more likely to come.
These stimulus measures will ripple through the global economy for years to come, driving a strong growth recovery once coronavirus is beaten, while reducing the risks of widespread corporate defaults and supporting higher valuation multiples for equity markets.
2. The best returns tend to come from the point of greatest pessimism.
As Warren Buffet famously said, investors should be “fearful when others are greedy and greedy when others are fearful.” One must remember that the value of an equity stake in a business is the present value of all future cash flows, not just those over the next few months.
The best rolling ten-year equity market returns, measured by the Dow Jones Industrial Average index, have come from the times when all hope seemed lost.
Investors buying equities at these points – including at the end of WW1 and WW2, at the depth of the great crashes of 1932 and 2009, and after Black Monday in 1987 – benefited from 10 year annualised returns of 10-15% per annum.
3. Markets will recover long before the economic and humanitarian crisis is over
Financial markets always move to reflect a change in the outlook for economies and corporate profitability well ahead of the fundamentals actually reflecting that.
This ‘lead’ effect means that declines in global growth and corporate earnings, as well as a rise in defaults, are already very much ‘priced in’ at this point.
Markets are already discounting much of the grim news which bombards us daily and, while the news flow is unlikely to improve for some time, they will almost certainly begin to recover well before the worst of the economic and humanitarian impact is felt.
4. For those making regular savings, or with additional reserves to invest, lower valuations mean more shares/units can be acquired for any given cost. This ‘dollar cost averaging’ effect creates greater value over the long run.
Market outlook: where to invest - and where to avoid!
Source: Just Service Global
The recovery could be fairly swift and a lasting positive impact on e-commerce, lifestyle brands that support social distancing and remote working (like tele-meetings)
The biggest losing sector so far this year is the energy at 68% (energy demand and glut of oil - crude oil prices have fallen dramatically)
Others on the losing end:
- gas and consumer fuels
- airlines, travel, automobiles, hotels, restaurants and leisure
- financial services
Where to invest now
- Utilities are expected to be resilient as they provide essential services to the community
- Technology sector - with a greater embrace of remote technologies (good for the big tech providers).
- 5G Technology: the coronavirus contagion is reinforcing the importance of the ultrafast 5G technology, the next generation of wireless. 5G announces the capabilities of the Internet of things and home gadgets.
- Alternatives: The main categories of alternatives
1. Hedge fund investments. Through those who pursue a number of specialist strategies
2. Private equity funds investing directly in to private companies or investments or engage in buyouts of existing companies
3. Real estate This liquid but measures such as student housing data centres, infrastructure and toll booths very appealing
4. Credit: any credit that is not traditional. For example, collateralized loan obligations or the direct lending industry
5. Commodity traded advisors (CTA) trend following strategies that buy and sell season markets depending on momentum and volatility
Today alternatives are becoming more popular to retail investors. This is not surprising given markets are becoming harder to navigate with opportunities becoming more difficult when you are seeking low volatility, enhance returns and an increase in overall diversification. All risks should be clearly explained and documented by the financial advisor offering “alternatives”
In the current market alternatives could populate approximately 25% of portfolios.
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