What should your investment portfolio look like after Covid-19?

Covid-19 is changing the world in ways we don't understand yet, and that applies to your investment portfolio.

Nothing will look the same after the pandemic, which has sent share prices crashing, destroyed livelihoods, and could slash global gross domestic product by as much as a third.

Stock markets have partly recovered in expectation of the biggest fiscal and monetary stimulus package in history, but investors cannot afford to sit back and relax. The world has changed, and your portfolios need to reflect that.

Right now, I would stick to quality companies with strong balance sheets, steady cash flows and strong business models.

Rahim Daya, Barclays Private Bank UAE

Stéphane Monier, chief investment officer at Swiss private bank Lombard Odier, says the most likely outcome for the economy is that after a deep recession in the first half of 2020, there will be an unsteady, “non-linear" recovery in the second half. “The other scenario is that a second wave of infections delay the recovery," he says.

However, he remains optimistic as the bank’s data shows that China, the first economy to be hit by the pandemic, is on the mend. “Chinese electricity demand is now at 108 per cent of 2019 levels. As people start driving, traffic jams are also higher, at 106 per cent of last year,” he says.

Some sectors, notably travel, will be slower to recover than others. “Chinese flight traffic is only at 58 per cent of last year's levels. In Europe, it is under 5 per cent,” he says.

Rahim Daya, head of Barclays Private Bank UAE, says that in volatile times, clients pay much closer attention to their portfolios. “We advise clients to stay invested in any market condition, as equities should continue to deliver attractive returns over the medium to long term.”

It is impossible to time the market with consistent success, whether you are buying or selling. Instead, Mr Daya recommends investing regular sums to “average in” new contributions. “Right now, I would stick to quality companies with strong balance sheets, steady cash flows and strong business models.”

Mr Monier says in today's uncertain times, liquidity is essential. Nobody wants to be left holding an asset they cannot sell.

He therefore suggests avoiding high-yield and emerging market debt, as this often has heavy exposure to the volatile oil market. “US high-yield bonds include a lot of issues from shale producers, while oil producers Brazil and Mexico have been hit by falling prices," he says.

Mr Monier suspects the oil price recovery has peaked for now, as energy consumption remains low. “For years, oil traded between $50 and $100 a barrel. In the future, I see a range of $30 to $50. For the UAE, the good news is that less than 30 per cent of its GDP is now directly exposed to the hydrocarbon sector.”

He is targeting US and Asian equities, which seem likely to fare best in a recovery, but is sceptical about Europe, and emerging markets outside of Asia.

Overall, Lombard Odier takes a balanced approach to portfolio construction, putting 43 per cent of client money into equities. "When markets crashed in March, we bought more equities to maintain our exposure. Clients benefited from the subsequent rebound, he says.”

Mr Daya says the healthcare sector looks attractive today. “It compares well to other defensive sectors, such as consumer staples, utilities and telecoms. Growth prospects and earnings visibility are much stronger, and the growing, ageing global population will drive demand," he says.

Mr Monier says the crisis is also set to accelerate trends that were already under way, such as the growth in technology and digitisation. “Technology has proved itself during the pandemic. Children can study at home. Businesses can talk through Zoom. Online commerce is growing. If this happened 30 years ago, companies would not be able to function, but they can today.”

Manufacturing is likely to experience a growth in robotisation in a world where a pandemic can stop production overnight.

Covid-19 is not the only threat out there. Climate change is another major concern, and Mr Monier says investors need to examine environmental, social and governance criteria when selecting stocks, and beware companies with high carbon footprints.

Investors should also target companies with sustainable business models. “You do not want to invest in the next Kodak, which was destroyed by digital cameras, or Nokia, wiped out by smartphones.”

China now contributes around 20 per cent of global GDP, and Mr Monier now directs 2 per cent of client portfolios into the country.

Another 6 per cent goes into safe haven gold. “The precious metal does not pay interest, but in a low inflation, low growth, low interest rate world, this is less of an issue.”

Japan accounts for another 4 per cent of the portfolio mix. “The Japanese are great savers, and invest heavily overseas. When there is a crash, they repatriate their money, and the Japanese yen rises in value, offsetting losses elsewhere.”

Christopher Davies, chartered financial planner at The Fry Group, says investors must accept that markets can go down as well as up, before they start investing. “That makes it easier to stomach a downturn like today. History shows downturns tend to be short compared to the bull market that will typically follow.”

There have been a string of bear markets in the past, defined as a drop of 20 per cent or more, but share prices always recovered over time, he says.

Although shares tend to offer the best return over the longer run, there are benefits to diversifying into bonds and gold as well, Mr Davies says: "It makes for a much more comfortable investment journey and reduces your dependence on stock market growth for performance.”

The key is to find the right balance of assets that matches your personal attitude towards risk, then try to maintain it.

Like many planners, he favours asset allocation, which means building a spread of assets that reflect your attitude to risk.

Once you have done this, you can take profits from your strong performing assets and top up those lagging in your portfolio, Mr Davies says. Effectively, you are selling high, and buying low. “This allows you to lock in gains made on your best-performing assets and buy into assets at a lower value."

The key is to keep your portfolio risk in line with your tolerance and not drift into a riskier portfolio as equity prices outpace other assets over time. “This will help to steady your portfolio returns when downturns hit.”

Mr Davies says building a balanced portfolio in this way will install the discipline you need to avoid selling in a crash. “If you change your portfolio when emotions are high, you are likely to make mistakes. Also, you will miss out on some of the rebound.”

Investors should still be alive to opportunities, and right now they might find them in smaller companies and emerging markets. “These may offer higher returns, provided you understand the added risks,” Mr Davies says.

The record-breaking bull run after the financial crisis encouraged more investors to go it alone, rather than take independent financial advice.

Mr Davies says that may now change in these volatile times. "If you are worried about being disciplined and knowledgeable in difficult market conditions, you should consider speak seeking advice from a qualified and regulated adviser.”