Non-correlated geographical locations and sectors of the economy is the 'new normal' within investment portfolio composition.
Gold prices are surging and it's actually one of the few assets showing positive returns this year. It offers great diversification away from equities. Notice that the increase since the beginning of 2020 is part of a longer upward trend. In other words, it should not be attributed only to the COVID-19 pandemic. The amount of gold you should hold in a portfolio is determined by your attitude to risk and the time horizon you are looking to invest for.
Listed Real Estate:
Listed Real Estate as an investment has suffered significant volatility this year with Covid and has seen large losses. This is due to people working from home and the outlook for office rental being unclear. Other aspects of real estate associated with the technology industry like online shopping and warehouses plus logistics, are likely to benefit under the ‘new normal’. Listed real estate is an important part of a diversified portfolio and would generally be viewed as lower risk than equities. It allows you to derive income from the ownership, trading, and development of income producing real estate assets. This is limiting your exposure to one particular area, size or market.
Government Bonds in certain countries in Europe and Japan are currently offering negative returns due to Government Stimulus resulting from Covid. Government bonds have traditionally offered less volatility than equities as they are backed up by governments around the world. As well as providing stability government bonds will generally offer higher levels of income than cash. At the moment, US Treasury can give you decent levels of income. With inflation risk potentially increasing over the next couple of years we would only suggest inflation protected government bonds.
High Grade Corporate Bonds:
High Grade Corporate Bonds have become more popular as they typically offer a higher rate of return than government bonds. The corporate bond market has been given a boost also because the FED has gone into it for the first time. If you buy corporate bonds with the large multinational companies, they can be almost as safe as government bonds. Investing in the bonds of smaller companies will potentially increase your return but also the risk.
Infrastructure can also be seen as a good asset class to invest in, especially given government commitments to spend large sums on infrastructure to help economies recover from the Covid crisis.
Large Tech Companies:
Large Tech Companies are the big winners in this Covid crisis and the performance of their stocks since March has surprised everyone. With governments around the world pumping money into the economy equities are where you are going to earn money now. However, they will not all be winners forever so active management will help you follow these trends profitably. E-commerce is one of the areas that will continue to grow long term with an increasing impact worldwide.
Pharmaceutical companies are very much in the news due to Covid and the pressure to develop a vaccine. This sector also offers good diversification and many of these companies pay good dividends which helps with performance in a diversified portfolio. A vaccine in development by the University of Oxford and Astra Zeneca showed promising results in early human testing and they are starting with large-scale trials now. China’s CanSino Biologics and a partnership of Pfizer and BioNTech also delivered positive trial updates, indicating progress in the pursuit to defeat the pathogen.
US Equities offer global investors the greatest liquidity when investing and the greatest selection. Over the past few years US equities have outperformed most markets. With the upcoming Presidential elections, this will create uncertainty and potentially limit the upside in the market. The current friction in the relationship between the US and China will also keep a lid on US Equities and global markets. If Biden wins, it’s unlikely he will control Congress and the Senate and it’ll be hard for him to unroll Trump’s policies like deregulation and tax cuts maybe some of them which will be unfriendly for markets. If Trump wins, he will just continue doing what he has been doing which has often times been regarded as very beneficial to the financial markets. Nevertheless, there have been a number of occasions where his unforeseen political acts were causing volatility.
The UK will be leaving the EU by the end of the year, that’s definitive now. There will be some kind of deal allowing free trade to continue and not on WTO basis as everybody is relying on one and another heavily. Even though the UK might be faced with some higher cost to streamline everything and also at the borders but everybody will be ready for it by the end of the year. However, the UK market is one of the worst performing and is down 20% this year which could create great opportunities especially in medium sized companies once the recovery will set in.
Emerging Markets are naturally more volatile than the more mature markets but offer diversification and potentially good growth. Emerging market valuations still look cheap making it relatively interesting for equity investors both in the short term and the medium to long term.
Renewable Energy with an accelerated shift focusing on green businesses also provides another investment opportunity. Companies as well as governments have to prepare for future pandemics changing the way we live, eat and work. We are also seeing pressure from organisations and individuals to compel governments and companies to act in a more socially responsible way.
Cash, last but not least. Leave some cash in your portfolio to take advantage of when markets drop. Investing your cash at different times also helps reduce risk as you are not putting all your money to work at the same time.
Published By Tomas M Koolhaas, MBA.