BLOG: Building an investment strategy for the post-pandemic world

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If 2020 was the yr of the Covid-19 virus, then 2021 is ready to be the yr of the Covid-19 vaccine. By paving the way in which to unlocking inhabitants mobility, this considerably improves the medium-term financial image for a variety of sectors crippled by the pandemic.

Nonetheless, the stability of dangers in play means we aren’t advocating inserting any new massive bets at current.

Balancing dangers inside an funding portfolio

Whereas vaccine rollouts are deeply welcome, and are offering some mild on the finish of the tunnel, the pandemic has not but left us. Certainly, Covid-19 continues to be very able to affecting many kinds of human behaviour, together with shopper decisions. Information of a vaccine has been broadly welcomed, however when authorities help programmes around the globe (just like the UK’s furlough scheme) roll away, the true influence of this financial shock will come into focus.

Nonetheless, whereas the financial scars left behind by the pandemic might be long-lasting, lots of the financial help mechanisms set in movement by governments and central banks all through 2020, are additionally more likely to be right here for the lengthy haul. That is welcome information for a recovering world, and for monetary markets.

In the interim, we’re holding general portfolio threat ranges regular, and we aren’t advocating for any sharp or robust strikes into larger threat funding areas. In apply, this implies sustaining our slight desire for these belongings meant to drive monetary returns versus these designed to diversify portfolio threat. We additionally retain our conviction in our chosen themes and asset varieties, and handle a broad vary of portfolio dangers rigorously and opportunistically.

Considering world, whereas taking a discerning method to underlying native markets

Our method by no means considers entire areas as homogenous markets; after we allocate investments to a selected geography, we take care to contemplate the precise elements impacting every a part of that market.

For instance, on the time of writing, inside our pretty low allocation to the UK market, we’ve got a comparatively decrease place within the shares of bigger UK firms. As an alternative, we want the shares of small and mid-sized firms, which we predict provide enviable development potential and are more likely to come into favour when the worldwide enterprise cycle experiences a setback.

We additionally favour rising markets, and our allocation to this extremely numerous group naturally contains preferences for alternatives in particular international locations. We now have long-held positions within the onshore China inventory market, in addition to positions within the bond markets of particular rising economies.

One good instance is the Indian bond market, the place each authorities and company bonds can provide engaging returns in a world of extremely low bond yields. For instance, 10-year Indian authorities bonds have a nominal yield of round 6%; beneficiant yields like this could present a cushion to handle any forex volatility.

Additional, about 90% of the Indian bond market is owned by home (somewhat than worldwide) traders, which lowers the chance of enormous numbers fleeing the market within the occasion of any turbulence.

Getting artistic concerning the constructing blocks of your funding portfolio

The core philosophy behind our portfolios is the concept of diversification, and our multi-asset method signifies that we embody each conventional and various asset varieties inside our portfolios. We imagine that this type of diversification has the potential to assist long-term returns in two methods.

First, it helps us to handle portfolio dangers. Everyone knows the previous saying ‘don’t put all of your eggs in a single basket’, and with this ethos in thoughts, our portfolios comprise a variety of investments which do various things at totally different instances.

Second, we really feel that diversification will help to reinforce portfolio returns over the long term. By accessing investments exterior of the normal funding universe, we increase the vary of alternatives out there in pursuing monetary returns.

Mixing conventional and non-traditional portfolio positions

Amongst our extra conventional inventory market holdings, we proceed to favour key themes together with expertise and healthcare. Governments are more and more reliant on expertise and technological options to maintain the financial restoration going, whereas the significance of the healthcare sector has spoken for itself over the previous 12 months.

In the meantime, we even have excessive conviction within the various asset varieties inside our portfolios, corresponding to our holdings in music royalties, renewable power, social housing, and non-traditional lending. Market strikes in these areas seem uncorrelated to these in wider monetary markets, resulting in engaging selection among the many belongings we maintain for the aim of producing returns in addition to these used to diversify threat.

You will need to create selection amongst portfolio ‘diversifiers’ too. We recognise that authorities bonds could not easy the journey in the way in which they as soon as did, and bond yields at extraordinarily low ranges hardly make for compelling investments. Therefore we personal gold, have publicity to the Japanese yen, and ‘tail threat’ hedging methods – specialist merchandise designed to guard in opposition to sharp, dramatic market falls.

Graham Bishop is chief data officer at Handelsbanken Wealth & Asset Administration 

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