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BLOG: Building an investment strategy for the post-pandemic world

Emma Lunn
Written By:
Emma Lunn

If 2020 was the year of the Covid-19 virus, then 2021 is set to be the year of the Covid-19 vaccine. By paving the way to unlocking population mobility, this substantially improves the medium-term economic picture for a wide range of sectors crippled by the pandemic.

However, the balance of risks in play means we aren’t advocating placing any new large bets at present.

Balancing risks within an investment portfolio

While vaccine rollouts are deeply welcome, and are providing some light at the end of the tunnel, the pandemic has not yet left us. Indeed, Covid-19 is still very capable of affecting many types of human behaviour, including consumer choices. News of a vaccine has been widely welcomed, but when government support programmes around the world (like the UK’s furlough scheme) roll away, the true impact of this economic shock will come into focus.

However, while the economic scars left behind by the pandemic will be long-lasting, many of the economic support mechanisms set in motion by governments and central banks throughout 2020, are also likely to be here for the long haul. This is welcome news for a recovering world, and for financial markets.

For the time being, we are holding overall portfolio risk levels steady, and we are not advocating for any sharp or strong moves into higher risk investment areas. In practice, this means maintaining our slight preference for those assets intended to drive financial returns versus those designed to diversify portfolio risk. We also retain our conviction in our chosen themes and asset types, and manage a broad range of portfolio risks carefully and opportunistically.

Thinking global, while taking a discerning approach to underlying local markets

Our approach never considers whole regions as homogenous markets; when we allocate investments to a particular geography, we take care to consider the specific factors impacting each part of that market.

For example, at the time of writing, within our fairly low allocation to the UK market, we have a relatively lower position in the shares of larger UK companies. Instead, we prefer the shares of small and mid-sized companies, which we think offer enviable growth potential and are likely to come into favour when the global business cycle experiences a setback.

We also favour emerging markets, and our allocation to this incredibly diverse group naturally includes preferences for opportunities in specific countries. We have long-held positions in the onshore China stock market, as well as positions in the bond markets of specific emerging economies.

One good example is the Indian bond market, where both government and corporate bonds can offer attractive returns in a world of incredibly low bond yields. For example, 10-year Indian government bonds have a nominal yield of around 6%; generous yields like this can provide a cushion to manage any currency volatility.

Further, about 90% of the Indian bond market is owned by domestic (rather than international) investors, which lowers the risk of large numbers fleeing the market in the event of any turbulence.

Getting creative about the building blocks of your investment portfolio

The core philosophy behind our portfolios is the idea of diversification, and our multi-asset approach means that we include both traditional and alternative asset types within our portfolios. We believe that this kind of diversification has the potential to help long-term returns in two ways.

First, it helps us to manage portfolio risks. We all know the old saying ‘don’t put all your eggs in one basket’, and with this ethos in mind, our portfolios contain a range of investments which do different things at different times.

Second, we feel that diversification can help to enhance portfolio returns over the long run. By accessing investments outside of the traditional investment universe, we expand the range of opportunities available in pursuing financial returns.

Blending traditional and non-traditional portfolio positions

Among our more traditional stock market holdings, we continue to favour key themes including technology and healthcare. Governments are increasingly reliant on technology and technological solutions to keep the economic recovery going, while the importance of the healthcare sector has spoken for itself over the past 12 months.

Meanwhile, we also have high conviction in the alternative asset types within our portfolios, such as our holdings in music royalties, renewable energy, social housing, and non-traditional lending. Market moves in these areas appear uncorrelated to those in wider financial markets, leading to attractive variety among the assets we hold for the purpose of generating returns as well as those used to diversify risk.

It is important to create variety amongst portfolio ‘diversifiers’ too. We recognise that government bonds may not smooth the journey in the way they once did, and bond yields at extremely low levels hardly make for compelling investments. Hence we own gold, have exposure to the Japanese yen, and ‘tail risk’ hedging strategies – specialist products designed to protect against sharp, dramatic market falls.

Graham Bishop is chief investment officer at Handelsbanken Wealth & Asset Management