- Marcus Brookes
- 03 June 2020
- 5 mins reading time
I took part in an online webinar chat for clients last week. The topic of conversation, “Is now a good time to invest?” was suggested by clients. Here is a brief summary of what we discussed.
Firstly, my colleague, David Ryder, provided a summary of the direct and indirect implications of the Covid-19 pandemic. To date, we’ve had 6 million cases confirmed and more than 360,000 deaths according to Worldometers.info.
The lockdown restrictions are a necessary part of what I refer to as phase one of the response: survival. The consequence has been to reduce economic activity drastically. This has led most economies into recession, sending unemployment rising and share prices falling.
Effect on assets
The FTSE All Share Index dropped by as much as 35.5% between 1 January 2020 and 23 March, before staging a partial recovery leaving it 18.8% lower on 28 May. Share prices across Continental Europe have performed similarly. But it’s been a slightly different story in the US where technology giants, such as Amazon, Google, Netflix and Facebook, have benefited from people staying at home and making greater use of online services.
In the world of bonds, the demand for lower-risk rated ones, such as those sold or “issued” by US or European governments, has increased sharply. This has sent their prices up and their yields down (the price and yield of a bond always move in opposite directions).
Bonds issued by companies (corporate bonds) have had a more mixed time. Corporate bonds generally have higher-risk ratings than government bonds. As a result, the demand for and prices of corporate bonds dropped significantly in March because investors were worried about the ability of companies to maintain the annual interest payments and final repayments of bonds that they had issued.
However, investors were reassured by the substantial financial support and stimulus that was pledged fairly quickly by a large number of governments and central banks (such as the Bank of England). This suggested that companies would have easier access to money to tide them over during the crisis, better enabling them to meet their bond and other debt obligations. Investors subsequently moved money back into corporate bonds, pushing their prices up, though not to as high as they had been before the crisis.
Is now a good time to invest?
If, like me, you think of “investing” as buying into an asset to allow it the potential to grow for at least three years (though my preference is 10 years), then I would say that now could be a good time to invest (depending on your individual circumstances). If you’re thinking of a shorter period than that, then it’s much harder to give a general response because the short-term outlook is so uncertain.
The reason why I think that now could be a good time to invest according to my understanding of the term, relates to what I consider to be the most likely outcomes for the economy. Although as with all investing nothing is guaranteed.
If we are able to deliver a careful and data-driven easing of lockdown restrictions, AND the financial support continues to flow from governments and central banks, then I think we have a good chance of a relatively strong recovery in 2021.
I think this is possible because the furlough and other financial programmes that have been put in place, were designed to sustain companies and households through the worst of the lockdown. The intention was that people will still want and be in a position to buy holidays, cars, restaurant meals and plenty more once the lockdown is lifted. At the same time, businesses should also be able to re-open and provide those goods and services.
This will not be a smooth ride. Aside from the human tragedy, there will be some permanent economic damage in terms of unemployment, lost businesses and an element of fear that might lead people to be more inclined to save rather than spend.
Whatever happens, asset prices are likely to make sharp movements both up and down while we grapple with the virus and how long it will take to return to a new “normal”.
With that in mind, I would be reluctant to invest for a short-term period as anything could happen. However, over a longer period, I think that carefully chosen stocks with solid cash flows and positive market prospects could offer positive growth potential at the moment. This positivity could also apply to some corporate bonds as well but, again, careful research would be essential when choosing where to invest.
I would be less keen to put more money into government bonds than I already have. Their prices are at or near historic highs, so the potential for further rises is limited.
However, concerning the portfolios that I’m responsible for, I feel it critical to maintain a mixture of different assets including bonds as this helps to mitigate losses in one asset class when there is a sharp movement in overall confidence and expectations. Recent weeks have demonstrated the value of this sort of diversification.
The final point I would make is that investing is a very personal consideration. Your needs and circumstances are unique, and I would implore you to get professional investment advice before committing money.
These are the views of Marcus Brookes, Chief Investment Officer of Schroders Personal Wealth, as at the time of publishing.
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Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.
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