By David Thomson
Now that the initial panic has subsided, investors are turning their thoughts to portfolio fine-tuning or perhaps even radical restructure as they seek to capitalise on a possible “new normal”.
For now, there is no definite end in sight to Covid-19. The longer it goes on, the more profound its long-term impact will be on the economy. However, amid crises, there are often opportunities. Investors may be forgiven for worrying about the obvious disconnect between the current weak economic news and the apparent strong market rebound. However, markets typically look ahead and now perceive that governments and central banks have their backs in the short term, freeing them to focus on the longer-term winners and losers.
Having observed the performance of different assets in recent weeks, investors are also starting to perceive themes and trends that will help them make their decisions. When markets are volatile, investors typically retreat to assets that hold their value. For example, healthcare stocks have been a major beneficiary of the pandemic since typically not only do they hold their value, but it seems likely that both governments and the public will spend more on healthcare in the future. We may also see areas of the economy such a gyms and wellbeing benefit from this trend.
Covid-19 also appears to have accelerated several trends that were already in play. For example, many who were reluctant to try online shopping have been forced to adopt it and are seeing the benefits. Consequently, the demise of the high street as we know it may come sooner than expected with investors avoiding some retail stocks. Related to this is the trend towards a cashless society that may benefit payment services firms.
It appears that more people will work from home in the medium to longer term. We have seen that it is possible for many businesses to operate entirely in this way and while the office is not dead it may become a quieter place as more avoid commuting. What does this mean for property investments which are now suffering from the double blow of less demand for retail and office space? Will the beneficiaries be investments related to residential property as people spend more time at home, requiring more and better space? Housebuilders, DIY and tradesmen could be the beneficiaries.
However, one of the best performing areas of the market has been technology. The sector may have looked expensive before lockdown but it is easy to see why companies such as Netflix that deliver online streaming content would benefit. Similar companies that are investing now for the longer term have also seen their share prices benefit because of the lower interest rates that may remain lower for longer and support growing companies.
Successive supply-driven oil shocks during the outbreak culminated in the Brent crude oil price dropping to a 21-year low. Could this mark the beginning of the end for oil as society shifts to greener, alternative sources of energy that are less susceptible to market shocks? The sharp fluctuations in the oil market may push investors to choose alternative sources of energy for their portfolios. This may continue to support an ethical investment theme which in the short term benefited from little or no exposure to fossil fuels and those sectors such as airlines that consumed them.
Finally, will short term economic support prove to be inflationary as we recover? In such a situation, gold may prove popular since it may be a good hedge against both continuing crisis and a rise in inflation that may accompany recovery.
For the moment, at least, there are opportunities to alter one’s portfolio, depending what your ultimate objective may be, and take advantage of short-term price movements, minimise losses, or acquire assets for long-term security and returns.
David Thomson is chief investment officer at VWM Wealth
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