POSTED 23RD JUNE 2020
We’re pleased to follow up our newsletter of 17 June 2020 with the remaining answers to the questions raised in our Webinar Q&A session on 20 May 2020. If you missed it, you can watch the recording below.
We think we have now answered all the questions we received, but if we have missed any please let us know. Likewise, if you have a question you want to ask after reading our recent newsletters or if there is anything at all you would like to discuss with us we would be delighted to hear from you. Please email us at firstname.lastname@example.org.
Are there any sectors we should be avoiding or investing in?
Brooks Macdonald has noted that there are potential opportunities in all sectors and geographies and go on to say as follows.
Those holdings which have performed well in the downturn such as technology and healthcare could continue to perform well. Those working at home as a result of the lockdown have shown how this technology can help the working environment. For example, Zoom and Netflix have seen boosts in customers and revenues. Is this likely to subside significantly after we have come out of lockdown? Probably unlikely. Video conferencing could continue to grow as companies keep travel budgets under more control.
If we look at sectors which have underperformed over recent months, the oil and housebuilders companies come to mind. The oil sector came under pressure as there was a significantly oversupply globally as a result of economies going into lockdown and businesses going into “hibernation”. This resulted in the oil price decline mentioned in an earlier answer which affected the prices of stocks such as BP and Royal Dutch Shell. However, as we emerge from lockdown then there is more demand for oil once again. The return of smog to some Chinese cities shows that demand is getting back to normal. Whilst the oil price is low, this helps boost economies, particularly oil-importing countries such as Japan.
Housebuilders have had to mothball construction sites, and many have stopped paying dividends. However, those companies with a good land bank or with a foothold in the affordable housing market should do well. We have already seen construction sites restarting in order to satisfy the pent-up demand for new build property, which should provide a welcome boost to the sector.
Are you adjusting investments during the lockdown? Is it all bad or is there news of how a recovery will happen with a bounce-back?
SEI and their underlying managers are using the volatility to make active management decisions in the long-term interests of their individual strategies. Here is a selection of active positions taken by managers they have mandated:
- Decreased exposure to the sectors worst hit by the coronavirus crisis, these include tourism, leisure and luxury goods sectors.
- At the start of the year, SEI had already been reducing exposure to China due to growth concerns, this was accelerated during the early stages of the crisis.
- Initiated a position in Gold. Gold tends to be a reliable diversifying asset in times of uncertainty, providing a measure of “risk-off” protection, and should also perform well as a store of value (think hedge against inflation). Precious metals issuers within our high yield asset class should also provide a measure of diversification and counter-cyclical performance.
Once the situation stabilises, we expect a sharp recovery just as we have seen after most other crises in the past. The precise timing of any potential recovery is difficult to predict. Recent actions taken by both governments and central banks around the world will hopefully be enough to fend off the worst-case economic outcomes. This should provide a solid floor under markets once rates of infection slow, and thus provide the foundation for a sustained rebound. This will provide a more favourable environment for active managers making investment decisions based on fundamentals.
What’s the general situation for fund valuations and pension pots, and predictions for the next 12-24 months?
Aberdeen Standard Investments believes that the general situation for fund valuations and pension pots is obviously dependent on their asset allocation mix – those funds with a greater bond exposure will have performed well this year, those with equity exposure less so.
It is important to remember that markets are forward-looking and discount the entire stream of potential future earnings. In that context, a couple of quarters of negative growth is painful, but, so long as the long term earning prospect of firms is not fatally diminished, not a reason why markets must remain permanently depressed. Indeed, the fall in interest rates – all else equal – boosts this argument as future earnings are discounted at a lower rate, which mechanically pushes up prices today.
With regards to predictions, Morningstar says don’t believe that anyone can consistently make predictions about the next year or two and you should be very sceptical of those that try. What we do know is that COVID-19 has contributed to a great dispersion in valuations across asset classes. While some markets (such as the US shares) have recovered rapidly and appear to have a lot of good news ‘priced in’, others such as the UK and some of the emerging markets look much more attractively valued. This presents good opportunities for portfolios managers to improve the returns through careful research and selection of the most attractive assets.
While the benefits of these activities may not be seen in the very near future, over the long term, this approach could have a very meaningful impact on the returns investors receive and the progress they make towards their goals. In the meantime, it is important that the risk of the portfolio is managed carefully so that the portfolio can withstand whatever the next two years bring.