10 LESSONS FOR INVESTORS FROM THE COVID-19 CRISIS
BY PAU MORILLA GINER, LONDON & CAPITAL’S CHIEF INVESTMENT OFFICER
These are some key lessons that we believe investors should have learnt from the last six months:
01 DO NOT FIGHT CENTRAL BANKS…
Sticking to this rule has been particularly rewarding when it comes to credit in companies with strong growth prospects and solid balance sheets.
02 …BUT DO EXPECT THEM TO LOSE RELATIVE IMPORTANCE IN THE NEXT FIVE YEARS
Since Lehman’s collapse, there has been so much attention on central bankers: their actions, their omissions, their words, their silences, their dot plots. Do not expect for central banks to be as important from now on; rates are close to zero, so the marginal impact of monetary stimulus will be lower, and transmission mechanism remains broken.
03 WE HAVE ENTERED THE AGE OF FISCAL DOMINANCE
There is a new sheriff in town: Fiscal authorities. Fiscal stimulus is key to providing relief to companies and restoring households’ confidence.
04 ACCEPT THAT VOLATILITY IS GOING TO BE HIGHER THAN IN THE LAST TEN YEARS
Investors need to care less about mark-to-market considerations and more about the inherent quality and nature of the investments they hold. When crisis strikes, breathe, step back and look at the big picture. Ask yourself these questions: are most of my assets liquid? Are they resilient? Is the thesis that made me buy these assets still valid?
05 CONSUMERS WILL REMAIN CAUTIOUS…AND WITHOUT THEM THERE IS NO V-SHAPE RECOVERY
Savings ratios have increased and will remain high for a long time (i.e. higher buffers of cash). Wealth managers like us tap into an opportunity to help clients increase the yield that such cash pools provide.
06 THINK LONG-TERM…
Long-term performance is available to those who remain invested for that long-term horizon.
07 …BUT DO NOT FORCE YOURSELF TO PREDICT TOO LONG INTO THE FUTURE
There is such high VUCA (Volatility, Uncertainty, Complexity, Ambiguity) that it is foolish to think you need to be right over long horizons. Focus on shorter maturity bonds or sectors of structural strength.
08 WITHOUT A GROWTH CATALYST, VALUE EQUALS VALUE TRAP
The cheapest equity sectors (hospitality, energy, industrials, transportation, financials) can remain cheap, unless there is a catalyst that would suggest a recovery in growth and inflation that could boost these assets.
09 INFLATION IS NOT A PROBLEM IN THE SHORT TERM, BUT PAY ATTENTION
The era of deflation is still with us, but even modest inflation expectation shifts could create deep reverberations across financial markets. Many clients are asking what could upset portfolios, and indeed inflation is one answer. The important follow-up question is how to protect portfolios against an inflation pick-up? The answer is relatively straightforward: emerging markets, gold, gold miners, commodity producers.
10 SUPER CHEAP BANK EQUITIES ARE COMPATIBLE WITH STRONG BANK BALANCE SHEETS
The valuation gap between tech stocks and bank stocks is now the largest in 20 years. This is not a reflection on banks’ health: banks face a potential rise in bad loans, but their balance sheets are far, far stronger than in 2008. We believe our clients’ exposure to financial bonds is still warranted.