BUILDING RESILIENCE


Wei Li, CFA

Keep it brief

  • Market sentiment has rebounded significantly in H2, with markets nearing all-time highs. Yet with near-term risks including second waves of Covid-19 and new lockdown measures, geopolitical uncertainty, and credit valuations being stretched, we focus on building portfolio resilience.
  • We emphasise seeking resilience, beyond traditional sources and through a multi-asset lens.
  • We see an increased role for quality companies, secular growth trends and private markets alongside inflation-linkers and Chinese assets as sources of ballast.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Market sentiment has staged a rapid comeback after the shock to global growth earlier this year. Many global equity indices have surpassed pre-pandemic levels, or are close to doing so, and credit spreads have followed a similar path helped by unprecedented policy support from central banks and governments. However, major risks persist, including second-wave virus cases, waning policy support, and geopolitical tensions.

How can investors build portfolios that incorporate resilience at a granular level?

  • We like the quality factor, which is associated with characteristics such as strong balance sheets and high levels of free cash flow generation, helping its resilience in risk-off and risk-on scenarios.

  • In the short term, we like higher-yielding US treasuries, although low yields and rates are challenging the role of government bonds as ballast on the strategic horizon. We like inflation-linked bonds, with a preference for the longer term as we see room for inflation to surprise to the upside.

  • Exposure to private markets may be another part of the resilience toolkit. By targeting different asset classes and geographies, with a quality bias and a focus on long-term sustainability, such strategies may add to diversification benefits.

    Gold has also been favoured heavily by resilience-seeking investors in 2020, due to its low and negative correlations with global equities and rates, respectively.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy.

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