Investors should look to increase investment diversification in their portfolio to combat the market effects from the coronavirus pandemic, a global fund manager has recommended.
JP Morgan Asset Management global market strategist Kerry Craig made this suggestion based on the experience that during market downturns, such as the current COVID-19-driven slump, the correlation between asset classes such as equities and bonds increases.
Craig said this phenomenon highlights the importance for individuals to look beyond traditional fixed income and share allocations within their investment portfolios.
“Investors are likely to stay defensive until there is clarity over the health response to the virus. But this is exactly when investors should review how portfolios performed during this period and consider a greater degree of diversification that includes alternatives for income and growth,” he said.
With regard to equity markets, he noted share prices have now factored in the peak of the COVID-19 viral spread in Europe and the United States, but cautioned earnings forecasts have not kept up with changes to the economic outlook. As such, he expects equity markets to experience another drop when earnings expectations are subsequently revised.
“Markets are forward looking and will likely lead the economic recovery, however, history shows that the economy can recover lost output from a recession faster than the equity market gets back to prior highs. While valuations have made the long-run outlook for equities better, we remain cautious until the earnings picture becomes clearer,” he noted.
Monetary policy worldwide will make generating returns from yield more difficult, he pointed out.
“Central banks now have one job, to keep money as cheap as possible to allow governments to support economic activity via spending. As a result, expect the hunt for income opportunities to further intensify with investors looking for yield across different asset classes and markets,” he said.
To this end, he cautioned individuals to be discerning about the fixed income sectors in which they look to invest and emphasised sectors supported by central banks, such as government bonds or investment-grade debt, are very different to those that are not.