Pandemic and portfolio management: how to maximise performances
Health and healthcare represent an input and at the same time an output of economic development.
Simultaneously, the health emergency is accompanied by the economic and financial emergency and a factor not to be underestimated is the emotional impact linked to the actions of the individual.
The effects on the economy do not go in second place and savers begin to wonder how the market will behave and what the most effective strategies to implement in these circumstances are.
How will investments react to the consequences of the virus? What approach to take to safeguard your portfolio?
History has seen a succession of health emergencies, the Spanish, Sars, bird flu, swine fever, Ebola and Zika.
What is important to highlight is that markets have never been characterized by a linear trend or progression but on the contrary contractions and collapses are periodic.
During each emergency it seemed that the markets were the end, but history tells us that each of them has been followed by a recovery.
In the short term, it is clear that portfolios experience high volatility due to multiple negative events.
Certainly, it is time to leave aside the emotion and take into consideration guidelines that include a strategy that has a medium-long term time horizon and diversification as key factors 4.
Hasty decisions could only lead to wrong timing: divesting when the markets go down increases the risk of losing the benefits of their physiological recovery.
One conclusion can be summarized in not forgetting that there are structural thrusts, such as demography, technological evolution and the countinuous search for greater well-being, thanks to which in the long run the world economy as a whole tends to develop.
For this reason, it is necessary for the individual to arm himself with patience in the awareness that markets are recovering and tend to grow.
A recent study by the Finance department of the University of Colorado in Denver compares SARS experience to the current Covid-19 emergency, predicting that markets will reach their minimum by mid-April 2020 1.
A long-term investment strategy suggests doing nothing and going along with current volatility.
But the strategy highlighted by the study suggests adopting the same principles that apply during a period of bear markets 1.
These bearish market crashes have in the past provided astute traders with numerous short selling opportunities for global indices and individual stocks 2.
Other solutions come from the world of private equity which at the moment represents an approach in line with what is outlined in the previous paragraphs.
In this sense, the virtue of private equity is that it can cope with the short-term volatility of valuations of long-term assets held 3.
The private equity market offers the opportunity to invest in those activities belonging to more resilient sectors that are less likely to be affected by the negative incidence of coronavirus or where its impact can at least be quantified. These include sectors such as technology, business services, software, renewable energy.
Among the less volatile assets, it is important to highlight the world of renewable energy. The production generated by the solar panels, wind turbines, etc., will continue to bear its fruits thanks to the daily sequence of night and day and the natural presence of the wind.
“Concerns about the performance of ESG funds in falling markets appear to be unfounded,” notes Jon Hale of Morningstar. “Sustainable equity funds outperformed the crisis better than equity funds in general.” 5.
Hale compared the one-week and year-to-year returns of all 203 open-end, stock-traded sustainable US equity funds with those of their peer groups. For the week of March 2-6, returns of nearly 70% of sustainable equity funds ranked in the top half of their respective Morningstar categories. Over 40% ranked in the first quartile of its category 5.
These evidences denote how this market represents a real opportunity even in uncertain and unpredictable circumstances.
An analysis of the value of shares in France from February 19 to March 9 conducted by the Canadian company Impak suggests that companies that truly integrate sustainable development goals into their strategy may not only increase their performance in a bull market, but also be more resilient in a bear market, as in this case 5.
In conclusion, the past suggests that a patient approach is preferable to an impulsive one based on “belly” sensations.
The market will physiologically follow the trend linked to economic development, technological advancement and the improvement of well-being.
A diversification strategy and relying on competent people guarantee adequate portfolio management, which to date seems to have become a particularly complex challenge.
1. Bonaparte, 2020. Bonaparte, Yosef, Pricing the Economic Risk of Coronavirus: A Delay in Consumption or a Recession? (March 5, 2020). Available at SSRN: https://ssrn.com/abstract=3549597 or http://dx.doi.org/10.2139/ ssrn.3549597
2. CMC Markets, 2020. https://www.cmcmarkets.com/en-gb/trading-guides/how-to-trade-the-bear-market
3. Euromoney, 2020. Article read on 12.03.2020 through https://www.euromoney.com/article/b1kqj5hgfjsg3j/private-equity-can-be-the-big-winner-in-the-covid-19-bear-market?copyrightInfo=true.
4. Fineco Bank, 2020. Newsletter Marzo 2020.
5. Impact Alpha, 2020. Dennis Price, https://impactalpha.com/the-upside-of-sustainable-investing-in-a-down-market/.