Investment Thesis Forming Around 2021 Post-COVID Rebound

The Market Is Expecting a Broadly Positive 2021

Faced with one of the strongest shocks that the economy has suffered throughout history, it is logical that the vast majority of investors reacted by making changes in their portfolios. What is surprising, however, is that more than three in ten (35%) seized the opportunity to increase their exposure to riskier investments. The latest installment of the Schroders Global Investment Study, an annual benchmark survey involving more than 23,000 investors from around the world, points out that a significant portion of savers saw an opportunity in the February stock market crash to continue investing.

The Survey Results

The survey, conducted in 32 locations between April 30 and June 15, 2020, asked investors about what they had done after a period of extreme volatility caused by the confinement decreed in the most important countries in the world to try to contain the advance of the COVID-19 pandemic. Between mid-February and mid-March, equity markets around the world lost roughly a third of their value *. Almost 80% of those surveyed stated that they had made some modifications to their portfolio due to this situation. Only 19% indicated that they left their investments “where they were.” A small group (3%) did not notice any upheaval in the market, so they did nothing. Among the 78% of investors who did modify their positions as the crisis developed, the responses were very varied. 53% of them claimed to have rotated “a part” or “a significant part” of their portfolio towards lower risk investments. However, 35% did the opposite: rotate “a part” or “a significant part” of their portfolio towards high risk positions.

Bullish Market Before Covid-19

“Instinct tells us to take cover after a big shock,” says Rupert Rucker, Director of Revenue Solutions at Schroders, “so it is not surprising that some investors sold because of the COVID-19 outbreak. But it is striking that there is such a large group of people who did the opposite and increased their risk allocation. ” Rupert interprets this data as a sign that investors are increasingly “value conscious”. “You have to remember that COVID-19 came into our lives after a long bullish period in the markets, and I think many investors were aware that valuations were starting to be high,” he adds. “For this reason, they took the correction experienced in February-March as a window of opportunity. I believe that we are facing a large army of investors not only committed to the stock market, but also increasingly attentive to possible moments of value. ” In the short term, the decision of some of the optimistic respondents has probably paid off, as markets have recovered strongly from the lows they marked despite the continued release of disturbing economic data. “It may also be that investors are getting used to the fact that the stock market and the economy in general do not always go hand in hand,” he says.

Are Older Investors More Used To Shocks Than Younger Ones?

Age or experience – or both – seem to clearly influence how investors respond to volatility. According to the study, millennials (people between 18 and 37 years old) were almost twice as likely to change their portfolios than their parents, of the “baby boom” generation (between 51 and 70 years old). The oldest group of investors, aged 71 and over, were the least likely to change course. Rupert points out that there are several factors that could explain these results. “One is that perhaps older investors are more likely to have structured their portfolios according to a long-term plan. In this way, it is easier for them to “count to ten” in times of crisis and leave their investments as they were. ”

Savings Matter More after COVID-19

Since the pandemic began, investors have been more concerned about what will happen to their savings and investments. Before the coronavirus, 35% of investors thought about their investments at least once a week. After the emergence of COVID-19, that percentage has shot up to 49%. In total, 83% of those surveyed think about their portfolios at least once a month. But, in general, investors are optimistic about the negative impact of the pandemic on the economy. Most respondents estimate that the effects of the coronavirus on the economy will pass within two years, calculations that reflect optimism that is not shared by the official forecasts of many countries. For example, in the United Kingdom, the Office of Budgetary Responsibility, which now foresees consequences for the national debt that will last decades, asks to what extent “the economic and fiscal damage caused [could] be irreversible”. Again, the comparative optimism of those surveyed could be due to the fact that we are leaving behind a decade of juicy returns in equity markets – even if the global economy faced significant challenges.

Investment Income: Savers have Unrealistic Hopes

One area in which the opinion of those surveyed was not so positive is the one related to the profitability they expect to obtain with their portfolios in the next 12 months. In 2019, investors expected their positions to return 10.3%. In 2020, after the COVID-19 crisis, that number has fallen to 8.8%. This is an amount, however it is still very unrealistic. The “natural return” on most investments – such as dividends received by shareholders or interest paid to bondholders – is well below 8.8%. In addition, one of the consequences of the COVID-19 crisis has been an even greater drop in these percentages. Many companies have cut or given up dividends after the outbreak. Bond yields have also declined, in part because various central banks, such as the Federal Reserve, have lowered interest rates and pledged to keep them low. This ultra-low rate environment is another possible explanation for why respondents seem willing to continue investing in the stock market or increase their positions in riskier assets.

Cash after COVID-19, Who has it, and for What?

Although some investors claimed to be rotating a portion of their portfolio towards lower risk investments, others went further and claimed they had liquidated. When asked what they had done after the outbreak of the pandemic, 18% of those surveyed stated that they had liquidated “an important part of their portfolio.” Rupert Rucker says this data raises new questions about investors’ intentions going forward. “The survey leaves us with an intriguing snapshot of investors’ attitude towards cash. It is clear that there are those who see it as a refuge in times of crisis, and some respondents claim to have sold equities and kept the money, ”he says. “However, the responses also revealed that a large part of them – more than a third – switched to higher risk investments, and that suggests to me that some investors keep cash and other less volatile assets as a ‘cartridge’ to spend. when stocks fall to attractive prices. “History has taught us that, in practice, it is very difficult to know when is the best time to invest. The most serious problem facing those who have liquidated the portfolio is probably deciding when to return to the market. “

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