By Kevin Wong, Senior Portfolio Strategist
What COVID-19 has taken away from us; it has also given. It has given us time to reflect on our blessings; it has given us time with our family when we were previously too busy to appreciate; it has made us more aware of the less fortunate; and made us appreciate those that are tirelessly delivering care to the needy; the list goes on.
Time to reflect: In the investment context, COVID-19 has also given. For those that embraced the “new economy” growth companies, returns have been rewarding and the current situation has served to hasten some of these trends and create new ones: e-commerce for basic necessities, gaming, video conferencing, food delivery etc. Thinking about it, isn’t it amazing that the act of gifting now involves the “delivery of food”. The fact stands that this small group of “new economy” stocks plus some large technology companies have led the solid rebound in US equities. The good news is that a balanced well-constructed portfolio should be nearing its break-even point for the year. But we have our concerns. Perhaps, this is the time to reflect.
[Enter Mr Hyde]. US-China tensions are back, and the US elections is certain to dominate headlines in the second half. There are also a few unknowns. When will a vaccine be found? Will global economies suffer a second wave of infections? Will we survive the Q2 earnings season? What does the post-COVID consumption chart look like? While the world is searching for a vaccine, we would argue that the average investor portfolio needs to be searching for one too (i.e. ways to preserve the portfolio value or ways to achieve that uncorrelated return).
Is there a case for Gold? There is a certain believe that there exists an under-allocation to gold by private investors. There is probably some truth to that. After all, gold has been trading sideways for a good part of the decade (until its strong rally starting from the middle of 2019) and some would argue that it has been counter-productive trying to allocate to gold. But with the unprecedented amount of central bank stimulus at work, rates could be lower for longer and there could be fewer US dollar positives, which in turn allows this precious metal to shine a little longer in the medium term.
What about Alternatives? We are careful in our selection. A sound strategy and an experienced manager can provide the portfolio with an uncorrelated investment return. As an example, we are convinced that different segments of the economy will experience different rates of recovery, hence we believe there is an opportunity set for financially stressed or distressed assets via an absolute return long/short strategy.
Offence vs Defence: “Don’t fight the Fed” they say. But we are struggling to convince ourselves that the world has found that necessary stability, especially with the “unknowns” above. The crucial element of our strategy is knowing when to play offence and defence. At this point, we are leaning towards playing more defence. We have started to reduce our allocation to equities by phasing in our profit-taking activities. With those proceeds, we are likely to increase our allocation into Alternatives and Gold. We are patiently awaiting an opportunity in the latter, perhaps after a period of consolidation.
Bottomline, this is probably a good time to be having a review, locking in some gains, or putting on some hedges.
