The Covid-19 pandemic, and associated global economic slowdown, has triggered a rollercoaster ride for global equities markets during 2020. The onset of the pandemic prompted a huge slide in the S&P 500 and other leading developed market equities indices during late February and early March, but then a strong recovery. By the end of July, the S&P 500 had regained much of the ground it lost in February and March – although this recovery has been driven by a select group of stocks, particularly in the technology sector. Some developed market equities indices – for example the FTSE 100 and CAC 40 – recovered lost ground, but currently sit well below their levels of early February. 

After an initial flight to safety, the survey finds that investors are reducing their holdings of low-yielding government bonds in favour of higher-yielding assets – including a mix of equities, investment grade corporate bonds and, in some cases, high yield, private debt, infrastructure and other alternative assets. The survey finds that some investors will increase their holdings in multi-asset strategies, designed to generate returns through a diversified asset portfolio that typically also provides a measure of downside protection.

This investment environment has also encouraged strong flows into gold, pushing the gold price past $2,000 an ounce for the first time and driving record investment in gold ETFs during the first half of 2020.

The survey finds that the global pandemic has triggered changes in working practices at many financial services firms that might have taken several years to become established without the pressures of this crisis. Technology has played a central role in ensuring business continuity during this period. Respondents say the value demonstrated by technology in managing the pandemic will result in a rise in technology investment in the longer term.

The crisis has also reinforced the importance of ESG principles in guiding how fund managers structure their investment strategies and how investors approach manager selection. Respondents tell us that the behaviour of companies towards their employees during the pandemic will have a major influence on how they are rated in ESG terms when the crisis subsides. Those that have demonstrated weak application to ESG principles may emerge with brand damage, and potential downgrades to their ESG ratings, from the crisis. 

Investors identify investment opportunities in emerging markets equity and emerging markets debt, supported in part by a weakening of the US dollar since Q1 and economic stimulus applied by governments and central banks. Asia offers opportunities to regional investors in equities, fuelled by its strong management (in many cases) of the pandemic and its early emergence from lockdown restrictions. For individual markets, the survey finds that China and South Korea offer the strongest prospects for investment in both emerging markets equity and emerging markets debt.

Open questions remain around how financial markets will respond as government emergency support measures are wound down. Central banks have played a central role in defining asset prices over the past decade, through a programme of asset purchases which grew to new heights during Q1 2020. 

But the crisis may need to play out further before we can evaluate concerns around moral hazard, where an actor may increase its exposure to risk because it does not bear the full impact of this risk, and implications these policy interventions may have for economic productivity over the longer term. Some commentators have argued that the huge government debt issuance required to finance the emergency support packages, overlying a decade of liquidity support from central banks, will result in diminishing productivity and a potential rise in defaults. 

No doubt these emergency measures were essential to prevent a wave of corporate closures and a surge in unemployment as the pandemic took hold. However, the debt obligation this has generated will have consequences for governments and their citizens for years to come.

© 2020 funds europe



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