The negative effect on share markets inflicted by the COVID-19 pandemic are unlikely to worsen, but investors should remain cautious about taking on more risk in their portfolios, a global fund manager has said.
“With the worst of the pandemic likely behind us, central bank-supported equity markets are unlikely to re-test their lows. Yet, while reopening momentum may well carry risk assets a bit higher over the near term, the tepid economic recovery and deep uncertainty over the virus outlook argue against a pivot to more risk-on positioning,” Principal Global Investors noted.
The manager suggested a reweighting of portfolios from defensive stocks to more cyclical shares and from large-cap companies to smaller-cap organisations should only be considered if market conditions continue to improve for the remainder of 2020 and into 2021.
“For the time being, however, investors should only selectively add cyclicals to their portfolios, focusing on companies with strong balance sheets, positive cash flow, less leverage and those that have a vision to benefit from new secular growth trends,” it said.
With regard to specific sectors, it identified two industries where the outlook in the immediate term was unfavourable.
“There are some sectors which may be facing a prolonged period of weakness. Aviation being perhaps the most obvious example. In recent weeks, several airlines have announced that they do not expect to resume normal operations until 2022 and Boeing, the aviation bellwether, expects it to take five years and anticipates the failure of at least one major airline,” it predicted.
“Similarly, with retail having to comply with social distancing measures for the foreseeable future, this sector also faces serious challenges. Even after lockdowns are lifted, market participants should anticipate a wave of business failures across many sectors and across countries.”