Global markets are currently in a state of turmoil as the COVID-19 virus crisis continues to run amok and government action is perceived as inadequate. While commentators are raising the probability of a recession to a near-inevitability, it should be remembered that interest rates are at historical lows and moving lower, extra fiscal spending is in the pipeline, and there are currently-sound employment and consumer balance sheet levels in key economies, including in New Zealand. This means that there is a fair likelihood that once medical and better quarantine solutions to the virus emerge and panic subsides, the typical consumer will not be as severely impacted as was the case in the Global Financial Crisis or during previous economic and market downturns.
This is not to minimise the current risks, which are clearly elevated. However, recent years have seen pricing distortions in financial assets as the result of an unusual lack of focus on risk. We believe this period of artificial over-confidence is in the process of being resolved, and that much better valuations (and the restoration of a range of risk premiums) will be the ultimate outcome. The timing of any sentiment improvement is not yet in the realm of investment strategy, as so much still depends on the medical and fiscal response being escalated by global authorities. However, we feel it is valuable to re-state our investment rationale and positioning as it applies to current and expected market conditions.
In summary, AMP Capital’s current multi-asset strategy is:
- Retain neutral exposures in equities, as the current correction is correcting prior over-valuations rather than based on fundamental corporate weakness. Bear in mind that dividend income from equity securities will be even higher compared to fixed interest coupons or cash interest income for several quarters ahead.
- Retain additional exposures in listed real assets, as sharp interest rate reductions around the world boosts the attractiveness of quality, reliable-yielding assets in infrastructure and property compared to bonds and cash once the current panic subsides and investors re-assess opportunities.
- Retain a focus on quality and value throughout asset classes, based on the existing preference through AMP Capital portfolios for quality, highly-rated and better-valued securities, in contrast to securities that have been favoured in the recent past by price momentum or market capitalisation size (which are usually both transitory, viewed in the medium-term).
- Keep cash holdings overweight in non-income focused funds, in anticipation of much better valuations emerging over the next 3-6 months.
- Focus on the sources of current active value addition to benchmarks we are seeing from most sector managers, re-visiting their strategies and ensuring that the active positions are still aligned with probable re-pricings of risk globally. Broadly, we expect risks our managers have been aware of in portfolio construction will be exposed, and our bias to quality will be rewarded compared to purely returns-maximising managers who have lowered their vigilance on security quality.
- Retain our alternative diversifiers rather than following crowded trades into now severely-overvalued sovereign securities. Cash is still preferred and the US dollar could move lower as the global interest rate differentials close further, potentially supporting the NZ dollar moderately in the second half year compared to the currencies of countries forced to move to zero- or negative interest rate regimes, or to forms of quantitative easing.
Article written by Greg Fleming, Head of Investment Strategy, AMP Capital New Zealand
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Originally posted on March 10th 2020
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