The stock markets experienced unprecedented fluctuations in the first quarter of 2020, but have since come back with a vengeance in the past few months. The losses in the first half of 2020 are therefore relatively limited. Why are economists optimistic? And are the risk factors still present?
Our Chief Investment Officer Wim Vermeir took a closer look at this topic and shares his comprehensive analysis of the financial market conditions. Read on for the key elements of his analysis.
We now have a better understanding of COVID-19 and know that we can control the spread of this virus through a combination of good hygiene, quarantine and contact tracing. Thanks to substantial investments, researchers and scientists are currently well on the way to finding a vaccine.
From an economic point of view, sectors that have been heavily impacted by the pandemic, such as the hospitality industry, tourism, culture and sport, are not generally listed on the stock market. Sectors with a strong presence on the stock market, such as the pharmaceutical industry, technology and telecom, have been less impacted by this public health crisis. Central bank initiatives have also played a major role in keeping our economy afloat.
The number of new infections continues to rise. The second wave is now at our doorstep and a mutation of the virus is also likely. Moreover, the first wave also threw us for a loop with record-high unemployment and an increase in the number of bankruptcies. Finally, no one can predict when the economy will go back to normal.
Interested in the complete analysis by Wim Vermeir, CIO at AG?
Government bonds: given the current low interest rates on these bonds, we have taken an underweight position in our Branch 23 portfolio.
In Branch 21, we are investing in alternative defensive measures, such as infrastructure loans, mortgage loans, direct loans to governments, and the financing of public low income housing projects. As these instruments cannot be repurchased by central banks, they offer higher yields for lower risk.
Corporate bonds: the yields on high quality bonds continue to be attractive, in particular due to the support of central banks. We continue to invest in these types of bonds, but less compared to the first quarter.
Equities: share prices surged in Q2 but a market correction is very likely in the short term. We have therefore chosen to keep our strategy unchanged for equities. If the market corrections are confirmed, we will buy more equities.
At the same time, we have developed a systematic phased investment plan. Given the current economic recovery and the low interest rate environment, the long-term valuations of equities are acceptable. We prefer European equities because Europe is handling the coronavirus pandemic better. We are also investing more in attractive value opportunities (value equities).
Interested in finding out more about our investment strategy and our Branch 23 funds?