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Uncertainty remains despite recent uptick

market uncertainty

Investment markets are still plagued by a number of long-term uncertainties that will not be quickly resolved.

The ongoing support governments and central banks are providing to national economies and the investment market is obscuring a high level of investor uncertainty, including how long these programs can continue at their current levels, according to an Australian-based investment manager.

Magellan head of research and portfolio manager Vihari Ross noted investment markets dropped in February and March, but have since recovered on the back of government support for businesses and consumers, and efforts to find a coronavirus vaccine.

“Since March, markets are up and there has been a sense of optimism from latching onto positive news around a vaccine and the degree of government and central bank support we have seen,” Ross said during a presentation at the recent SMSF + Investor Virtual Event hosted by the SMSF Association.

“The US Federal Reserve brought back all the programs seen during the global financial crisis and then some, and we have seen support for banks and non-bank lenders, as well as main street, and the cutting of interest rates all in an effort to ward off another financial crisis.”

According to Ross despite these support measures, investors should not expect them to continue indefinitely, which would have a flow-on effect on markets.

“We could think this support could go on indefinitely, but the reality is that despite the sugar rush, we are still staring down the barrel of uncertainty not only in the market, but in economic and health outcomes,” she said.

Ross identified the COVID-19 virus as the greatest area of uncertainty and whether a vaccine or therapy can be found and how long it would take to implement that solution. This in turn would impact on the length of time government programs could continue to run and raised the question of whether they would become more targeted and less generous over time.

These two issues had created an enormous hole in global economic output and questions remained as to how long governments could continue to fill the hole, she said.

“We have seen interest rates go low and given the shock we have seen, it does mean rates will stay lower for longer, which has significant positive implications for valuations of some businesses, but economically sensitive businesses or those facing structural disadvantages are unlikely to be worth more,” Ross explained.

As a result of these shifts, she recommended investors consider some form of downside protection in their portfolio to prevent being heavily affected by future losses.

“Downside protection is an important part of what we do and we spend time thinking about future return potential of businesses and what are the risks to that investment,” she said.

“This is important because the downside of a business can be disproportionate in terms of the impact on a client portfolio and absolute return they are left with.

“For example, if I start with $100 and the market falls 50 per cent, in order to get back to $100, any future return has to be at 100 per cent to get back to where we started, which shows the asymmetry the downside can have.

“If we can manage the amount of downside that we may be impacted by, so that it is only half of what the market sustains, for example, and then participate fully in the upside, then that increase will be closer to 150 per cent and this is a key way to achieve strong absolute returns.”

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