Flexibility has never been more important, warns CIO

Buy-it-and-forget-it approach has been a casualty of the pandemic as prolonged uncertainty beckons

Flexibility has never been more important, warns CIO

As Mike Tyson once famously said – “everybody has a plan until they get punched in the mouth”.

In many ways it’s the same for investors as they dust themselves down from a bruising 2020. It began with many celebrating the signing of the long-awaited US-China trade deal, with markets at record levels. Back then – it feels a long time ago now – it was the US election that was everyone’s prime suspect to be the narrative-controlling event for the year. Little did most of us in North America realise but as Chinese delegates were in Washington signing the trade deal, the country was already dealing with a virus outbreak that would quickly spread around the world.

Greg Taylor, CIO at Purpose Investments, said the speed with which everything changed is a great reminder to investors of why they must always be ready to adjust their plans and positioning. He added that this was supposed to be a year where central banks sat on the sidelines and watched the U.S. election unfold – with many expecting interest rates to creep higher with global growth and yield on the US 10-year Treasury supposed to approach the 2.5% level.

He said: “No one was expecting that by mid-March rates would be slashed to zero and bonds would rally to record high prices. The global pandemic seems to have changed our world forever. Simple tasks such as going to a restaurant, watching a sporting event in a crowd or even shaking hands with a stranger seem foreign. 

“We all must adjust to the new normal and be ready to adjust again with the world. ‘Buy and forget about it’ seems to be one of the casualties of the pandemic. The new normal looks much more volatile.”

Taylor explained that while the VIX is well off the highs of March, that doesn’t mean volatility is gone. Morgan Stanley looked at this by tracking three sigma cross-asset moves - a major price move in any asset relative to the previous day’s implied three-month volatility - and found that 2020 has already had more of these events than any year since 1998. “Things don’t look to be calming down anytime soon,” he said.

With fears of a second wave, a spike in cases in certain states and no sign, as yet, of a vaccine, the “new normal” is set to be dominated by news of the virus. Then there is the issue of the U.S. election when the unpredictable President Donald Trump will seek a second term. Taylor does not believe a Democrat victory has been priced into the market and that this could become the story for the summer. The key for investors, he added, is to remain flexible.

He said: “The first half of the year is now in the books. After a violent rebound that resulted in the strongest quarterly rally in many decades, predicting the second half of 2020 is very difficult. Safe-haven assets such as gold and large-cap tech stocks have led and appear poised to continue winning.

"A rotation towards cyclicals would go a long way to broaden out the rally and place it on stronger footing. For that to occur, global growth needs to re-emerge as the story. To watch for signs of this happening, look for a weakening US dollar, a higher 10-year bond yield and a breakout in commodities.

“The rebound in equities has been impressive off the March lows, but the all-clear has yet to be blown. We risk having priced in too much good news, which means disappointments will be meet with violent selling. A defensive posture for the second half may be prudent, but could also look foolish in the face of so many measures to promote higher prices. The only thing that feels certain is more uncertainty. Plan accordingly and be ready to adjust to new facts. Flexibility has never been more important.”