How Can Investors Position Themselves to Navigate the Enduring Effects of COVID-19?

With a record-breaking rise in COVID-19 cases, growing uncertainty around new restrictions, lockdowns, and economic setbacks has left many Canadian investors wondering how to navigate their way through the enduring effects of the pandemic.

As of October 17, Canada had 196,321 confirmed or presumptive coronavirus cases.

Meanwhile, south of the border, the US not only lays claim to more than 8 million of the globe’s 39 million+ coronavirus cases, but October 17 saw more than 70,000 new cases recorded in a single day for the first time since July, with at least 9 states setting single-day case records.

As caseloads continue to rise, so too does the ongoing volatility in many investment areas. Factor in the upcoming US election – and Dr. Theresa Tam’s recent assertion that “there are no quick fixes” – and it’s no surprise that investors are finding it difficult to know how to position themselves.

Exploring the stock market upheaval

The S&P/TSX composite index hit an all-time closing high in late February this year. One short month later, Canada’s main stock index had lost more than one-third of its value and the S&P 500 had fallen 34%.

The markets have made significant progress bouncing back since then. By late September, in fact, despite the worst economic contraction in history, the S&P 500 was up 44%.

Part of the reason why the stock market has rallied so effectively may be the stimulus packages offered by both the Canadian and US governments. As those ease off or discontinue, however, there could be a corresponding market response.

In a recent statement, Marc Desormeaux, Senior Economist at Scotiabank said, “The strength of the economic rebound since the peak lockdown period earlier this year has surprised on the upside. However, with the arrival of a second wave and new lockdown measures to curb the virus’ spread, COVID-19 continues to represent the primary forecast risk.”

How industries have performed since COVID-19

Investors can take this time to learn more about industries that are performing well. For example, some of the biggest winners since the pandemic-induced market trough in March have been in the tech, digital, and certain real estate sectors. Lockdowns, restrictions, and remote work have only contributed to the growth of biotech, telehealth, and video downloading and streaming services, while benefiting consumer staples (think discount retailers and grocery stores), online shopping, couriers, logistics, and single family residential housing away from city cores.

At the other end of the spectrum, some of the hardest-hit industries have included:

  • Arts, entertainment, and recreation
  • Accommodation and food services
  • Educational services
  • Manufacturing
  • Mining, quarrying, and oil and gas extraction

According to McKinsey & Company, it could take more than 5 years for sectors like these to recover in a muted economic environment.

Growth amidst the disruption?

Growth industries can do well during times of social and economic disruption, and as a result, may hold greater appeal for some investors than value stocks in the wake of COVID-19.

If you’re curious to know what notorious value-hunter Warren Buffett has been up to this year, here’s a brief, $18.5 billion synopsis of the companies Berkshire Hathaway has invested in during 2020’s third quarter:

  • Bank of America
  • Dominion Energy (natural gas transmission pipeline and storage)
  • Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo (Japan’s five largest trading companies, and importers of critical supplies and resources)
  • Snowflake (cloud data warehousing)

Tech, digital, and cloud entities that support video conferencing, online retail, or at-home versions of traditional services may prove some of the most promising avenues as we wait for restrictions and lockdowns to unfold – especially amidst predictions that remote work and leisure are here to stay, at least in some capacity.

As more investors shy away from traditional businesses that haven’t fared so well during the pandemic, like non-essential brick-and-mortar retail and airlines, for example – a growing social spotlight has spawned high hopes among many institutional investors where ESG (environmental, social and governance) considerations and portfolios are concerned.

Other investment areas worth looking into

Diversity is an important consideration for minimizing investment risk at the best of times, but is especially so during times of uncertainty.

Given that we’re seeing lower than expected returns versus historical estimates for both equities and fixed income vehicles in the current climate, it can be worth considering a diversified portfolio positioning that includes multi-sector products and liquid or alternative investments like:

  • Hedge funds
  • Private equity and private debt
  • Real estate and assets that provide collateral backing such as private mortgages and mortgage funds

The Bank of Canada held its interest rate steady this month at 0.25%, which is where it’s expected to stay until the economy recovers and inflation is back on target. The appeal of bonds is likely to remain low as a result, with dividend-paying investments like Mortgage Investment Corporations becoming more attractive for their cash flow potential.

As the economy slowly recovers, position yourself for agility.

As the effects of COVID-19 endure, one thing seems certain: the impact the coronavirus has made only reinforces the importance of taking a holistic view where your investments are concerned.

Adopting or maintaining an agile approach that lets you monitor your goals and respond to change accordingly may hold the key to long-term financial well-being.

As Canadian Mortgages Inc.’s Vice President, Capital Markets and Funds Julian Clas put it recently, “Although all investments are risky, they are not all created equal. It is important to consider that risk to reward ratio and determine your comfort level as well as your risk tolerance.”

Until people experience a major downturn, like the one caused by COVID-19 in the first quarter of this year, they don’t always have a realistic sense of how much downside they can tolerate in their portfolios. 

It’s definitely been a wakeup call, says Tina Tehranchian, FP Canada Fellow and Certified Financial Planner with Assante Capital Management Ltd. “I think it’s a golden opportunity for advisors to revisit risk with their clients [while] it’s fresh in their memory.”

Some of Julian’s tips for weathering a market downturn include:

  • Considering your options
  • Learning about alternatives
  • Determining your short and long-term goals
  • Considering collateral-backed investments

Zero-bound interest rates, meanwhile, pose both an opportunity and a risk for investors – especially retirement planners and those already in retirement.

To maximize retirement income during the current upheaval, investors need a smart strategy that balances risk and reward while also accounting for inflation. A greater focus on inflation-mitigating strategies, like MICs for example, could be worth pursuing in the long term.

While this is not your average economic downturn, looking at strategy precedents set during previous recessions may also hold value:

  • Some industries historically do well during economic slumps – while others even thrive due to changes in consumption patterns or consumer behaviour
  • Essential industries involving food, shelter, healthcare, consumer staples, and utilities can perform especially well in a recession
  • Every setback is different: while financial firms were ravaged in 2008, for example, energy companies are among the hardest hit in 2020

You should also bear in mind that stocks and sectors that perform well during a recession may not continue to do so when the economy recovers. And where COVID-19 is concerned, public policy decisions will have a significant impact on which industries do better or worse.

On the upside, some government officials believe the global economy is unlikely to worsen – even as countries face a second wave of infections.

Still, as you reposition your portfolio today, it’s wise to stay tuned to current news and remember that you may need to continue to tweak your investment strategy in the weeks, months, and years to come. 

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