Positioning for a slower recovery
Coming into the year with a good exposure to more defensive asset classes helped us in the first half of 2020. We had slightly more cash than usual and, where appropriate, significant allocations to gold. Both helped partially protect portfolios during the sell-off and allowed us to add to equity positions in March and April.
Global equity markets have rebounded by over a third since then. And while the outlook has improved since March, there is now a risk that investors are perhaps too optimistic about the pace of recovery. If activity does not pick up as quickly as expected, we could see a return to higher levels of volatility. We have not made significant changes to our asset allocation, although we have taken the opportunity to strengthen the defensive spine of our portfolios. We are prepared for a more challenging environment.
Within multi-asset portfolios, we have increased the defensiveness of our fixed income holdings by reducing our inflation-linked exposure in favour of conventional bonds. The latter tend to exhibit a more negative correlation to global stock markets and should better protect portfolios in the event of a further stock market sell-off. We also maintain significant exposure to gold, which has historically tended to perform well during equity market downturns and in periods of low real (after inflation) interest rates.
Managing risk in our equity exposure
Given our expectation that the global economy will in time recover from the shock of the pandemic, we are maintaining our equity weighting within portfolios at current levels. However, we have taken some steps to modestly reduce the risk profile of our holdings and tilt it towards sectors that are better positioned in the current environment.
Tech and healthcare fell less and bounced harder
Performance of MSCI World Index vs MSCI Technology and Healthcare sectors in 2020, rebased to 100
Source: Refinitiv Datastream, 6 June 2020. Past performance is not a guide to future performance
One area of concern is corporate leverage. It could be some time before the global economy is operating normally again and companies that borrowed heavily before the pandemic may find themselves with unsustainable balance sheets. In this environment, we have a focus on companies that are appropriately financed. As a result, our portfolios demonstrate a lower level of indebtedness than their benchmark.
A new theme we have introduced to portfolios during the quarter is infrastructure stocks. These companies’ earnings are often based on long-term contracts that are less economically sensitive and have an element of inflation protection. We believe they are currently attractively valued on an absolute and relative basis. They may also benefit from fiscal stimulus spending designed to help economies recover from the pandemic.
Finally, we continue to invest in themes, such as technology and healthcare, that offer long-term growth potential. This currently tilts portfolios more in favour of “growth” over “value” companies. We think this remains appropriate. In a very uncertain economic environment, companies that can offer some certainty of growth are likely to remain in high demand. While growth has outperformed value consistently for much of the past decade, we think Covid-19 could prolong the trend even further.
Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.