This article first appeared in Wealth, The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020
New waves of the Covid-19 outbreak in major parts of the world may have sparked fears of a double-dip recession but Zach Bevevino, director and product strategist for BlackRock’s Multi-Asset Strategies Group, remains optimistic that the global economic growth is on track.
While the risks remain, Bevevino thinks the worst may be over. “We saw a record drop and recovery in markets [this year]. In March, we saw the fastest bear market in history. The S&P 500, in just 22 days, lost 30% of its value. In the last couple of months, it has recovered that and then some … Ultimately, we think we are likely to see positive economic growth in 2021,” he said in his presentation, “Finding consistent high income in a low rate world”.
Bevevino was speaking at the third instalment of The Edge-Citigold Wealth Webinar Series 2020 on Nov 21.
His optimism is driven by the unprecedented global stimulus unleashed by governments and central banks in recent months. For instance, the US Federal Reserve expanded its balance sheet by roughly US$3 trillion this year, which exceeds what it has done historically.
Sizeable bills have also been announced by governments as part of their fiscal stimulus packages. According to BlackRock’s estimates, the policy response around the world has been equal, if not greater than, the estimated impact of Covid-19 on global GDP growth.
“The encouraging thing this time is the coordination of monetary and fiscal policies. Historically, it had been pretty difficult in some of the major markets to get fiscal policy done. That wasn’t the case this time around, as we saw some massive programmes announced in the US and Europe,” said Bevevino.
“This isn’t likely to go away. We are going to continue seeing stimulus [packages] and central banks [staying] accommodative, not just for 2020 but for 2021 and potentially beyond that.”
In combination, these measures have impacted the markets, which in recent weeks have been lifted by positive news on vaccine developments.
“Right now, there is going to be a push and pull in markets as they focus on rising virus cases but on the other hand, [respond] to encouraging news related to vaccines … We do think a vaccine is in the future and when things get under control, economies can rebound and do so fairly quickly.”
Meanwhile, Bevevino views the presumed outcome of a divided government from the US elections as a positive for the market. “It keeps the checks and balances on both sides. So, some of the transformational policies that are being proposed are unlikely to get passed, be it corporate taxes or increased regulations that could upset markets,” he said.
Investors are now watching the upcoming senate race in Georgia in January, which will determine the make-up of the senate.
Against this backdrop, investors cannot rely on traditional safe haven assets if they want to seek income. Negative interest rates are already a reality in some countries. According to Bevevino, there is more than US$17 trillion of debt with negative yield globally, exceeding the record set last year.
“The safe-haven assets of the world are no longer risk-free because they provide such low potential returns today. You risk not earning enough to meet your spending needs or keep up with inflation. We think investors need to get a bit more comfortable with taking on more risk,” he said.
There are opportunities for yield if investors look wider for avenues. In the fixed-income space, US and Asia high-yield bonds look attractive, he added. “If you look at Asia high-yield bonds, you can earn an 8% yield, while you can earn close to a 6% yield on US high-yield bonds. Compare this with investment-grade bonds that provide less than 2% yield today or the 10-year US Treasury [notes] that provide roughly 1% yield.”
Of course, investors have to be selective, as Covid-19 has resulted in a big divergence between winners and losers in different sectors. “Take the high-yield [bonds] of tech companies. [Their returns] are positive at about 8% year to date (YTD), whereas the high-yield [bonds] of energy companies are -16% YTD,” said Bevevino.
Another asset class that he highlighted was dividend stocks, which have underperformed this year. “[This is] partly due to the cyclical nature of the companies, and partly due to the idea that these companies were going through difficult times and had to reduce their dividends. But we actually think these companies are in reasonable shape and if the recovery persists, dividend stocks and equity income are going to be a necessary alternative for investors,” he said.
What about sectors? This year, much of the equity market growth has been concentrated in technology stocks, which are beneficiaries of the pandemic.
But Bevevino is now preparing for a post-Covid-19 world and is looking beyond tech. “It could be in some of the more cyclical parts of the market like industrial, financial or real estate investment trusts (REITs), which is another area that has underperformed this year. But once you see economies open up again, you will see further support for this asset class,” he said.
Again, investors have to be selective about REITs, as bricks-and-mortar retail and hotel assets have been impacted badly by the pandemic. Meanwhile, warehouses have benefited during the lockdown, as have data centres.
“I would emphasise that some of these areas [represent] long-term trends [such as] the idea that people are shifting online to buy things. That was happening long before 2020 and it was accelerated by the pandemic,” said Bevevino.
In terms of geographical areas, he has been shifting his exposure to Asia, which has rebounded from the pandemic quicker than other regions. “We also think the US is in a good position with attractive income opportunities such as high-yield bonds. We continue to like the resilience of US equities even though they’ve had a very nice run,” he said.
However, Bevevino is reducing some exposure to European assets that tend to be more cyclical in nature and can be impacted by rising virus cases. Other asset classes that he likes are preferred stocks and covered call writing. The latter involves selling call options on individual stocks, which can be interesting in a volatile market, he added.
Ultimately, investors must ensure they understand the risks of different asset classes and diversify their portfolios, said Bevevino.
Responding to a question on the potential repercussions of using massive stimulus packages to support the economy, Bevevino suggested that investors pay attention to inflation.
“Stimulus is intended to be inflationary in nature ... We think investors aren’t paying enough attention to that on a medium-term basis. You should think about that and how it impacts certain investments,” he said.
Another potential outcome is higher debt levels globally. This will not be a risk if there is stronger economic growth, but it can be damaging in the long term if the economy weakens, Bevevino observed.
There are also concerns about whether the stimulus packages are enough to support economic growth if vaccines cannot be developed in time. Could negative interest rates become more common?
Bevevino said this is unlikely in the US as the Federal Reserve has not indicated that negative interest rates will be part of its policy approach. Additionally, central banks have largely done their part to support recovery, so it could be time for fiscal stimulus to play a bigger role. “The debate has certainly shifted in the US about providing more fiscal support, especially if you see another rise in virus cases.”
With lower interest rates, duration risk could be something on the minds of bond investors. Bevevino suggested that being lower in duration could make sense for such investors now. “But I would also emphasise that we think having some exposure to government bonds is still an important diversifier in portfolios.”
In fact, developed-market government bonds are the most reliable diversifiers and safe-haven assets, he added. Gold could also diversify risks in a broad portfolio.
Themed “Thriving Amid Volatility”, the session is part three of four in the webinar series, which will continue to be held in the coming months.
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