Maintain a long-term view
Last November, we refreshed our secular outlook– as we usually do at the end of the year. At the time, we didn’t know about the coronavirus and what would eventually happen at the beginning of 2020. But strangely enough, several of the trends that we highlighted for the first time for the 2020 decade seem to actually have already started.
One of them for instance was the shift towards non-orthodox macroeconomic policies. It is true that in many respects, this crisis is unlike any previous one, but paradoxically investors should not become short-sighted. They should really keep a long-term perspective, because we tend to overestimate short-term change and underestimate long-term trends. Your strategic asset allocation is your anchor. You might review it once or twice annually, but any change to a strategic allocation should be well thought out.
Accept a certain level of risk
Of course in moments like these, the temptation to reduce risk and limit the drawdown in the short term is extremely high. It is precisely in these moments that we should remember that we cannot control the short-term direction of the market. We are rewarded for accepting those risks in the short term with superior long-term returns and if we miss strong days, strong weeks or strong months in the market, we will significantly impact long-term returns in our portfolio.
Think before you jump
Every decade ends and starts with a major crisis – like the financial crisis in 2008 or the boom-bust cycle of the dotcom era in the late 90s and early 2000s. These crises shaped the decade to come, but there are eventually good times ahead. After this downturn of unprecedented speed, relative asset valuation has moved to recessionary extremes, meaning the price of quality in a portfolio is at a record premium compared to lower quality assets – and that’s probably true to a large extent both in the equity space and the fixed income space. Because that value risk premium is very high, it might be tempting to jump into it. But we think it’s premature for a couple of reasons: number one, it might persist for quite some time and we’ll go through several ups and downs before the economy recovers – and markets reflect that. And number two, we are to an unprecedented extent hostages of policy decisions, so some companies might eventually be helped by policy makers to a greater extent than others, and government intervention in markets and the economy will also be very high going forward. Therefore, we cannot apply the usual mean reversion logic to value situations. Don’t catch falling knives.
Stay positive about China
One of the calls we made in the secular outlook is for a bipolar world, where we experience a Chinese-led economic and financial cycle coexisting with the well-known US economic and financial cycle. There again, we are fast-forwarding towards that new world. And more than ever we think China, which has been hit first by that pandemic, but has reacted very swiftly, will also be the first economy to recover. So more than ever, China is a core asset class in portfolios.
Embrace digital health
We also carved out life science disruption as an extension of technology disruptions. Of course, we never imagined at the time that the virus would disrupt our life in anywhere near the way it has in the last few weeks. But this highlights the merits and the importance of exposure to healthcare companies in a portfolio – across a wide range of things, but in particular to biotechnology, and also very critically to all the digital enablers in life science. This comprises all the companies that facilitate the transition towards a digitally enabled, data-driven healthcare industry.
Don’t panic about volatility
After the initial surge in volatility – about 80% on the VIX index – we’ve come back to slightly lower levels, but still very high in historical perspective. You will be rewarded a lot to sell insurance today, and we think investors should take advantage of that market paradigm to cash in attractive risk premium on volatility.
Responsible investing is here to stay
Last but not least, sustainability was already a major megatrend before this crisis. And given the consequences one can foresee for the economy, social life and politics, of this pandemic, more than ever companies behaving in a responsible, sustainable way are likely to outperform going forward. It’s not a blip, it’s a trend.