Newton’s Catherine Doyle considers key lessons for DC investors from the pandemic
1 Be ready for a range of outcomes. The fast-changing and unexpected events of 2020 have taught us that you need to be as flexible as possible when managing a portfolio, in order to deal with a range of scenarios.
When the force of the repercussions of the pandemic hit markets in March, coupled with a simultaneous oil-price shock, it would have been easy to be wrong-footed. It was vital to be able to quickly assess the implications of the backdrop and identify the winners versus the losers. For example, sectors such as technology were Covid-19 winners as businesses benefited from the enforced lockdowns by increasing their subscriber base. Other areas such as travel and leisure were hard hit, and it was important to avoid those areas that were in the eye of the storm.
2 Invest with purpose. The pandemic has put the spotlight on ESG issues, which are increasingly important in the mix when considering investment opportunities.
The global economy is currently going through a series of complex changes in areas such as climate, health and technology. We have had to stop and think not just about how we are treating our planet, but also about social and governance aspects associated with how entities are run. These aspects should be embedded in an investment process and considered thoroughly as part of the fundamental analysis of individual holdings; indeed, they will be increasingly reflected in a security's valuation.
3 Big government is here to stay. The scale of policy intervention in response to the Covid-19 pandemic far exceeds that witnessed in the aftermath of the 2007-2008 global financial crisis.
Monetary stimulus combined with fiscal injections may eventually give rise to price inflation that exceeds central bankers' expectations. Inflation will naturally eat into fixed-income returns, but rising yields can make the stocks of those companies with higher debt levels look less attractive compared to ‘safer' securities. There is therefore a need to be highly selective and mindful of the impact of greater state intervention, which may favour national champions at the expense of those companies with a more globalised approach.
Moreover, in such an environment, the appeal of real assets such as gold, which cannot be debased by central banks, increases.
Catherine Doyle is an investment specialist on the Real Return team at Newton Investment Management
Important information: These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.