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ROUNDTABLE

Looking beyond Covid-19

Genevieve Cua asks the experts for their base-case scenario and looking past the crisis, for their most promising investment ideas over the medium term

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Chan San-San, Head of Wealth Management & Segments Citibank Singapore.

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Kelvin Tay, Regional Chief Investment Officer, UBS Global Wealth Management.

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Cedric Spahr, Equity Strategist Bank J. Safra Sarasin.

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Hou Wey Fook, Chief Investment Officer, DBS Bank.

Chan San-San
Head of Wealth Management & Segments Citibank Singapore

What we have witnessed in the treasury, credit and ETF markets of late highlights the market's illiquidity and vulnerability. With the Federal Reserve having initiated ''credit easing'' actions we are seeing the effects gain traction across a wide range of credit markets. The trifecta concoction of shocks from Covid-19, financial market turmoil and collapse in oil prices have led Citi analysts to expect a dramatic deceleration of economic activity and to revise downward our global growth and earnings estimates for 2020.

Citi expects this to be more of a U-shaped instead of a V-shaped recovery, given Covid-19 is a global pandemic with an impact greater than any prior health crises. If fiscal policy is effective in averting a downward spiral of credit issues and rising unemployment, global consumption should be able to bounce back sharply and hasten the recovery. While not our base case, a worsening of the crisis would likely result in a more subdued market and economic rebound from an intractable recession.

While the period of market volatility and vulnerability appears longer today, recovery will ultimately ensue and may be stronger than investors expect. Looking out 12 to 18 months, we are beginning to see market opportunities outweigh risks as the discrete nature of the health pandemic and swift macroeconomic policy response provide reasons for optimism beyond the immediate period.

It is important to keep in mind that longterm investing in a core portfolio creates the best investment results. Market timing can be damaging to long-term returns. For long-term investors, strategic asset allocation is the first line of defense against an unanticipated shock like this. We think investors should capitalise on market dislocations to invest in unstoppable trends that are multi-year phenomena. Here are some investible themes we have identified:

  • New energy - global warming has farreaching implications on our ecosystem. There is an urgency to address this to avert major issues such as drought and rising sea levels. Massive electrification is a key solution to mitigate this by moving power generation away from fossil fuels and towards clean energy, thereby reducing emission levels.
  • Healthcare - As the developed world continues to age, spending habits of this cohort will evolve and the healthcare sector is likely to be a beneficiary.
  • Technology - Technology continues to shape both our physical and virtual worlds. Sub-themes such as cybersecurity, fintech, data storage will benefit an increasingly interconnected world characterised by cloud services, novel ways of meeting financial needs, and an insatiable appetite for Big Data to power artificial intelligence applications.

Kelvin Tay
Regional Chief Investment Officer UBS Global Wealth Management

In response to the volatile global stock and bond markets, the Federal Reserve rolled out its entire global financial crisis playbook in just three days. The European Central Bank launched a Pandemic Emergency Purchase Programme, backing its claim to do ''whatever it takes''. Fiscal policymakers are ramping up their responses too.  We believe that these measures, and the policymakers' willingness to do more, will help us to avoid a global financial crisis-style credit crunch.

We are starting to see signs of markets normalising with equities rebounding, credit spreads narrowing and an easing on dollar funding. However, we estimate that the kind of social distancing measures across many major economies globally will likely reduce private sector activity by between 20 and 40 per cent over the duration that they are enforced.

Market developments over the coming weeks will hinge on two key factors: First, whether we see further evidence that current measures are bending the curve and slowing infection rates. Second, whether the announced government stimulus measures succeed in preventing job losses. If governments can do this, then we could expect a relatively swift recovery in demand when economies reopen. By contrast, workers who lose jobs and companies that cease operations will be unable to participate in any return to growth.

As policymakers are trying to walk a fine line between sounding cautious enough to ensure compliance and also realistic enough for businesses to plan their futures, we need to maintain our focus towards a disciplined investment approach. At this stage, we think credit is closer to pricing in our downside scenario than equities and US investment grade, USD-denominated emerging market sovereign bonds, Asian Investment Grade and Asian High Yield all offer attractive opportunities in our view.

Many changes to our lives prompted by the Covid19 crisis will hopefully be short-lived but the pandemic will also accelerate some longer-term trends, leading to wider adoption of technologies like video-conferencing, virtual learning and telemedicine. Notably, e-commerce, already a fast growing part of the retail sector, has been further boosted by Covid19 as physical stores have been shuttered. Stocks exposed to online consumption, like gaming, online retail and food delivery are likely to benefit.

For investors who can use options strategies, we recommend restructuring equity exposure with put/ call strategies. The fear in the market allows investors to sell put options on both US equities to fund the purchase of call options at better prices. With higher volatility, equity structures could be an alternative to getting equity exposure, for example by selling outof-the-money puts and using the proceeds to buy closer-to-the-money call options This strategy provides upside exposure to rallies, while also automatically rebalancing into equities at lower levels should markets fall further. ELNs (Equity-lined Notes) and RCNs (Reverse Convertible Notes) are other viable options too.


Cedric Spahr
Equity Strategist Bank J. Safra Sarasin

We currently disregard classical sentiment indicators due to the systemic nature of this crisis, which has unleashed a wave of selling in both equity and credit markets not seen since 2008. Investors need to focus on coronavirus-related data, tracking the situation in each country, to find out whether more stringent mitigation measures (eg curfews) are on their way or, conversely, if the outbreak is abating, as has been the case in parts of Asia.

While nimble investors might be able to trade a rebound from late March into April-May, medium-term investors will await evidence that the leading Western nations will succeed in bringing the pandemic under control.

The Covid-19 crisis is more serious and longer lasting than previously assumed. It is now a global rather than only a temporary localised problem, so a global recession has become unavoidable. A V-shaped recovery, as has occurred following other supply shocks in the past, is no longer a reasonable scenario.

We believe that central banks and governments are serious about containing the economic second-round effects of the crisis. The ECB announced a new 750 billion-euro (S$1.2 trillion) asset purchase programme and the Fed committed to an unlimited bond-buying plan which will encompass corporate bonds. While central banks will ensure that financial markets and banks remain liquid, governments will need to do the heavy lifting by increasing fiscal spending massively. Investors will monitor the announced government measures - both monetary and fiscal - to ascertain whether they will suffice to cushion a severe downturn in economic activity in H1 2020 and allow for some stabilisation in the second half of 2020. We will probably have to wait until mid-year to see whether companies can look forward to a gradual return to normalcy toward yearend or in 2021.

We advise investors to maintain their focus on companies with stable cash flow growth; such companies can be found in the consumer staples, IT and healthcare sectors. We would only buy companies with above-average quality and growth characteristics, ie with strong balance sheets and robust cash flow generation. At the thematic level, we believe the Covid-19 crisis will boost online retailing and demand for digital office solutions in the coming years.


Hou Wey Fook
Chief Investment Officer DBS Bank

Until the number of new cases outside of China hits a peak, markets will continue to struggle for direction and display outsized reaction to incoming economic and corporate data.

We believe there is a higher probability of a ''U-shaped'' market rebound given the non-economic nature of supply shock. There are certainly many moving parts determining whether the eventual market rebound will be a ''U-shaped'' or ''L-shaped'' one. Much depends on: (a) How quickly the developed economies manage to contain the crisis; and, (b) how robust and coordinated the global economic rescue package will be.

From analysing how markets previously reacted to non-economic shocks in the past, such as the Sept 11 terrorist attacks, severe acute respiratory syndrome outbreak, and the Fukushima nuclear accident, markets have on average rebounded by 23 per cent over a three-month period after hitting trough.

We do not expect the rebound from Covid-19 crisis to be ''V-shaped'' like the examples quoted above, for these reasons:

  • The scale of this crisis is bigger, affecting many major economies in the world as opposed to more ''localised'' ones like the Fukushima nuclear accident; and
  • Restarting of global supply chains may be more difficult than anticipated. But we also do not expect markets to follow a ''L-shaped'' trajectory as growth will likely be underpinned by strong policy support. Hence we think a ''U-shaped'' rebound is the most likely scenario at this juncture.

We believe equities are the only game in town. As central banks around the world maintain a dovish stance given ongoing macro-anxieties, the hunt for yield will return to dominate the narrative in the second half of 2020. The Covid-19 crisis will undoubtedly have a negative impact on corporate earnings. However, we believe the giant wall of liquidity in the global financial system will continue to underpin risk assets. At the end of the day, money needs to find a home. And equities are the key beneficiary.

The prevailing market weakness is an opportunity for investors to gain exposure to longer-term structural themes like US e-commerce, healthcare, and millennial consumption. After all, this outbreak is not going to stop technology companies from innovating and adding new products to the pipeline. Neither is this crisis going to reverse the demographic trend of an ageing population which inherently raises global healthcare demand.

We continue to advocate a ''barbell'' portfolio which is built to last for the longer term. Such a portfolio would hold globally diversified securities in two areas of focus. In one area of focus, corporate bonds and dividend-yielding equities act as ''income generators '', while secular growth equities act as ''return enhancers'' in the other. We also add gold as a ''risk diversifier'' to the portfolio.

On growth equities, our ongoing conviction calls on technology, healthcare, and China equities remain, even as they have done well vs underlying benchmark indices. We are convinced such a portfolio construct will survive today's storms and ride the road to recovery ahead.

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