COVID-19 has impacted almost every facet of our lives – both personal and financial. Stock markets have been in flux, Canadians are concerned about their investments and it’s still unclear as to when domestic and global economies will be able to ramp up fully. Much uncertainty remains.
As we begin the process of making the transition to the “new normal,” financial advisors need to think about how to best position their clients’ portfolios in a period of ongoing volatility.
If anything is certain during these uncertain times, it’s that those who use an array of strategies will be more prepared for whatever the future holds.
Here are four investment strategies that could help Canada’s financial professionals create more diversified and resilient portfolios:
1. Opt for both growth and value
This crisis is reminding us that owning both growth and value stocks is best for diversification. With growth, investors buy companies that are either expanding their earnings or have the potential to grow them significantly in the future. Value stocks are companies that the market says are inexpensive but have potential to rise in price over time.
Over the very long-term, growth and value stocks have delivered roughly the same returns, but there are periods sometimes lasting a decade or more during which one investment style dominates. That has most recently been the case with growth stocks, which have outperformed value stocks greatly since the global financial crisis of 2008.
The COVID-19 crisis has put more of an emphasis on value stocks as many companies are now cheaper than they once were. Advisors are currently looking for stable, high-quality companies like grocers and food companies, which are typically considered value plays. Still, some higher-growth technology stocks are doing well now, too.
Betting that one style will outperform another can backfire as the out-of-favour options will, at some point, become popular again.
2. Invest in emerging-market bonds
Some may find it surprising that emerging-market fixed income can offer strong return opportunities – plus the benefits of diversification. Many emerging-market countries are in much better financial shape than they were a couple of decades ago. However, it should be noted that there’s still a level of credit risk associated with these markets.
In April, the JPMorgan EMBI Global Diversified index, which tracks emerging-market bonds, reported a 6-per-cent yield. Conversely, North American bonds hit record lows during the crisis; the yield for the 10-year U.S. Treasury was at only 0.62 per cent at the time of writing.
Several developing-market-based fixed income products, including cost- and tax-efficient exchange-traded funds, are available to Canadians. These offerings help shield investors from volatility while still providing potentially better returns than the low- or even negative-yielding bonds available from more traditional markets.
3. The case for Chinese equities
Despite the impact COVID-19 has had on China’s economy, it’s still an increasingly important high-growth nation. Once this crisis is over, many expect corporate earnings among Chinese companies to rise. That means Chinese equities could provide clients with enhanced opportunities for returns and risk diversification.
Chinese equities have outperformed Canadian and U.S. stocks since 2005, with the MSCI China Index rising by 219 per cent. Over the same time period, the S&P 500 has risen by 151 per cent while the S&P/TSX Composite Index increased by 58 per cent. China’s stock market also has a low correlation to both developed and emerging markets, while its leadership in e-commerce and digital technologies complements Canada’s financial and resources-heavy stock market.
4. Consider alternative investments
In January, 2019, Canadian investment fund companies began selling liquid alternative funds, which use alternative investment strategies, such as shorting and leverage, to protect portfolios from large declines in a down market.
Advisors should note that these investments are less likely to move in synchronization with traditional equities and fixed-income markets and can help stabilize an investor’s assets during periods of market volatility. Approximately $8-billion has flowed into these funds thus far and, given how volatile the markets could be in the coming months, interest in liquid alts should continue to grow.
Investments into traditional alternative assets, which could include real estate and listed infrastructure companies, can also help improve portfolios’ risk-return profiles. These holdings tend to come with decent yields – which are important when bond yields are so low, as they are now – and inflation-protection characteristics. Both traditional alternative assets and liquid alts will gain ground as more people seek to manage market risk and increase diversification.
Barry McInerney is president and chief executive officer of Mackenzie Investments.