SuperLife

Thoughts on investment strategy

The far-reaching threats of a global pandemic has given investors a scary awakening. As recent as February this year, we were still experiencing record highs in the local stockmarket. Rumblings in Wuhan’s Covid-19 outbreak were largely ignored by markets, even after China locked down the city to contain the outbreak.

It wasn’t until the European countries started experiencing the impact of Covid-19 that financial markets reacted. Within the blink of an eye, the US market went from euphoria to panic. The US market wiped off three years of gain in one week. The S&P 500 dropped 34% to a low of 2,237.40 on Mar 23 after a peak of 3,393 on Feb 19. Since then, it has bounced back around 27%.

At times like this, it’s useful to take a look what the market’s behaviour tells us. The indicators we use to gauge investor sentiment show there was a high degree of fear amongst investors. The Chicago Board Options Exchange Volatility Index (popularly known as VIX or the ‘Fear Index’) reflects the volatility implied in options pricing. In March, the ‘fear index’ reached some of the highest levels on record, and did this in the shortest timeframe ever.

The aggressive selling reflects a high degree of fear, similar to those seen during the GFC in 2007/2008. Markets have recovered some ground. However, we should expect large price swings (both up and down) to persist as markets assess the likely severity of the recession that will accompany Covid-19 and how long it will take for the economy to recover.

That will largely depend on how long lockdowns need to remain in place to contain the virus. We can gain some comfort from the co-ordinated efforts by central banks around the world to provide monetary stimulus and stabilise financial markets. This, in addition to massive fiscal stimulus governments are providing, are the actions needed to help economies recover when lockdown measures are eased. Both equity and bond markets responded favourably to news of these government actions.

Figure 2: A picture of fear-led selling on the S&P 500

Source: Bloomberg/SuperLife

Our government has made its single largest peace-time financial aid of over $20 billion, one of the largest amounts spent on each person compared with any country in the world.

The US Federal Reserve also announced aggressive plans to buy corporate bonds and make direct loans to companies through a US$2-trillion stimulus package. The UK has a US$39 billion economic stimulus in the pipeline while other nations are doing the same.

However, it will be between 6 and 12 months, at least, before global economies make any meaningful clawbacks to the growth levels seen before Covid-19 struck. The other unknown is how much central banks and governments can afford to continue supporting their economic stimulus programmes.

The downside of these actions is that we will see low returns on cash and bonds, and possibly negative real returns (after factoring in inflation) if policy makers are successful in their efforts to mitigate the economic impact and avoid inflation. However, these asset classes remain a safe place to invest for conservative investors or those with short-term investment horizons.

Spreads between corporate bonds and government bonds will likely remain wide for a time while investors remain fearful about the economic impacts of the lockdowns.

High quality corporate bonds could produce some attractive medium-term returns, especially those unfairly sold in the en-mass flight to safety. Many of these companies have strong balance sheets, with sound debt management practices. The SuperLife NZ Bond Fund is heavily geared towards these issuers.

In the riskier equities asset class, healthcare and technology sectors will do well for as long as the health threat from Covid-19 and social distancing remains in place. Should the lockdowns prove successful, and government and central bank measures result in a rapid recovery, then some of the most severely affected companies could perform strongly from oversold levels.

Lockdowns across the world has given the world a glimpse of weird and wonderful ways in which technologies can overcome the limitations of physical barriers. Technology companies have helped people to work, connect and shop. Companies with applied and tested technologies in these areas will be attractive, and funds with exposure to these sectors will benefit.

In a challenging economic environment, equities investors will be looking for companies with sustainable growth strategies and good governance. ESG-screened equity index funds are tilted towards companies that rank well on these measures, and we have seen these funds perform relatively well through this sort of turbulence. (ESG refers to environmental, social and governance investing.)

Our Ethica Fund is a balanced (60% growth and 40% income) strategy with sustainability overlays. Other ESG-screened regional equity exposures are currently only available through Smartshares exchange traded funds (ETFs). However, we do have plans to make these available on the SuperLife platform in the future. The Automation and Robotics and the Healthcare Innovation ETFs are also available through Smartshares.

It is incredibly difficult to generate short-term gains by switching in and out of funds. Many of the investors who switched out of risker equity investments as fears mounted did so at, or near the lows. Almost none put money back to work at the right time either.

The best strategy is often to invest more when others are fearful, and effectively accumulate assets at attractive prices. In our view, maintaining a balanced investment strategy and continuing to invest when assets are trading at a discount is the best way to achieve your investment goals over time.

What’s important is making sure your investment strategy meets your own return objectives and risk tolerance. Our managed funds and age-steps models are diversified and designed to cater to different age groups, what their risk profiles are, and when their retirement investments will likely be cashed out. If you are unsure of where you fit, find out here.

This strategy does not constitute financial advice and does not take account of personal circumstances; rather, it is designed to illustrate possibilities. As with all investment decisions, what might be the right strategy over the medium- or longer-term may not pay off over the very short term. No one can consistently predict what will happen over the short term.