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Allocators weigh up portfolio regime change; Risk rally cuts both ways for investors

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New normals

Allocators are still trying to fathom exactly how, if at all, Covid-19 is going to change the way in which they invest. And as with analyses of the virus’ impact on society as a whole, there are two dominant schools of thought: existing trends will accelerate, or else a more fundamental overhaul will emerge.

But even those in the first camp aren’t underplaying the potential impact on portfolio constructors. In a piece from last month titled “the End of Analysis?’, Gam multi-asset solutions head Julian Howard argues that stimulus programmes now in train make it even less likely that investors will focus on fundamentals any time soon.

That means more of the same for fund selectors: ultra-low interest rates benefitting companies who are betting on future, rather than near-term growth, and sector-specific asset allocation.

Mr Howard stops short of saying that fundamentals no longer matter at all. But he is in the camp that believe poor economic conditions can continue to work out well for the stock market. In the long-term, they may prompt a “better policy mix” as attempts to move beyond secular stagnation continue.  

Analysts at KKR pick up this latter point and run with it: they see the virus as a catalyst for an “investing regime change”.

The firm has long advocated this approach when it comes to 60/40 portfolios in particular. Its latest claim, that low yields mean sovereign bonds can no longer act as diversifiers, seemingly fails to take into account the existence of negative yields. But the suggestion that credit can take up some of the slack in the short-term will find some agreement among DFMs.

On the long-term consequences of the virus, it too thinks policy mixes will ultimately have to change, to focus on retraining programmes as much as fiscal and monetary stimulus. Working out the investment implications of that shift, however, is a harder task from the current vantage point.

Whatever it takes

In the meantime, risk assets continue to push higher on a weekly basis. Last week we touched on the strength of European equities; rising in tandem has been the euro, which has just posted its longest rally since 2011.

That rise has added an extra couple of percentage points to wealth managers’ European equity gains since the start of the quarter. The link to risk appetite was underlined last Thursday, when the European Central Bank announced an expansion of its latest stimulus package: the euro strengthened, not weakened, as a result.

The single currency’s taking a back seat this morning as doubts over the Franco-Germany recovery fund emerge. But a bit of scepticism is no bad thing from an investor’s perspective, particularly when contrasted with goings on across the Atlantic.

US equities’ indefatigable ability to climb higher is no surprise to allocators or policymakers at this point. But last Friday also saw economic data surprise on the upside, courtesy of an employment report that beat forecasts by some 10 million jobs or so.

With much of the economic damage from Covid-19 still to filter through, the risk to risk appetite might now be that policymakers think the need to act is over.

A booming market and mixed jobs data will make it harder to convince politicians to take the next steps – though the sight of civil unrest is, admittedly, a reminder that all is far from well. Runaway rallies can ultimately create problems for investors. Given the problems that still lie ahead, pauses for breath should be welcomed now more than ever.

On the charge

The FCA has given wealth firms a relatively clean bill of health in their initial responses to the coronavirus crisis: Megan Butler said last week that advisers and wealth managers had “responded well” to the onset of the pandemic in operational terms.

The next phase, as Ms Butler points out, is to ensure that resilience remains in place as business adapts to an economy that’s not locked down, but not firing on all cylinders either. And that brings in questions of financial resilience: her speech noted that the crisis has already put significant pressures on revenues. Few DFMs will be at risk of collapsing in the way that some peers have done in the past, but the regulator is very conscious of the need to protect client money.

At the same time, it claims to be keeping a close eye on exactly how revenues are amassed: “charging appropriate fees” remains high on its agenda. To date, however, that focus has targeted adviser charging structures more than wealth firms’ own. Any change in that approach would set alarm bells ringing for some discretionaries.

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