Investment strategy for a year of recovery from COVID-19

The recovery we expect for this year is likely to be quite volatile, depending on the foregoing race between increased vaccination and rises in contagion.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
The current year, 2021, has the potential to be remembered as the time of recovery from both the COVID-19 pandemic and the recession of last year. For the global and Israeli economies, last year featured the strongest recession since the world crisis of the 1930s. Yet, due to the activist and heavy response of policymakers a major socioeconomic catastrophe was avoided.
Finding a vaccine against the pandemic has been a major scientific achievement. It has also been a game changer, in that it gave rise to expectations and forecasts of a health and economic recovery. The election of Joe Biden as the new president of the United States has also added reasons for thinking of 2021 as a year of recovery.
Having said this, COVID-19 is still with us and the problem of contagion is far from being resolved. Hence, the world now is facing a race between increasing the speed of vaccination on the one hand, and increased contagion on the other hand.
From the standpoint of economic activity, we believe that there will be a major difference between the first and second halves of this year. In the first one, we will see more of the zig-zags from lockdowns to situations in which some of the limitations on various activities are eliminated, and then back to lockdowns, and so on. In the meantime, the process of vaccination will continue and even become more rapid and efficient than before. For the second half, the hope is that vaccination becomes more effective and hence there is less of a need for lockdowns.
In sum, the recovery we expect for this year is likely to be quite volatile, depending on the foregoing race between increased vaccination and rises in contagion.
World and Israel’s capital markets have shown an important degree of resilience during 2020 and to a large extent they focused on the new opportunities that came together with the coronavirus crisis. The past year ended marked by various stock market indices reaching historic highs, and so has the start of the present year. Clearly, market participants treated this as a temporary crisis. In addition, the very low interest rates and high monetary liquidity supported the markets’ positive trends.
At Peilim Portfolio Management, we recommend an investment strategy for this year that relies on the assumption that monetary and fiscal expansions will continue throughout the whole year. The current operating mode by governments and central banks around the world can be summarized by the words…”do whatever it takes to avoid a major recession.” As long as inflation pressures remain weak, and the economic recovery has not become strong enough to tighten labor markets, there will be no reason for withdrawing from these expansions.
A key feature of the world economy, including Israel, is the existence of negative real yields to maturity along short, medium, and even long term maturities. This follows primarily from the policy of central banks, who not only set the overnight policy rate but also hold various quantitative easing programs, purchasing medium and long term bonds in an attempt to flatten the yield curve. Accordingly, investing in fixed income, such as government bonds, is much less attractive than in normal times. Still, fixed income assets should be part of any portfolio, due to their potential role in diversifying the latter’s risk. Investing in corporate bonds, we believe, should be done in a highly selective way.
Under these conditions, our preferred asset class are equities, based on a broad diversification across countries and sectors. As far as country diversification is concerned, we recommend having a significant part of the portfolio invested in equity markets in foreign countries. In particular, we stress investments in US companies, as well as in markets in Asia, such as China, South Korea and Taiwan. With regards to sector diversification, we very much like technology, taking into account subsectors such as AI, cloud computing, cyber, medical equipment and others.
Should the March 2021 election in Israel result in a decisive outcome, so that one could expect to have a relatively stable governing coalition thereafter, this could increase the attractiveness of our stock market. Israel is in real need of stable and credible economic policies, including a government budget for the next two years. A situation like last year’s, without an approved budget and well-defined multi-year economic policy, should be an exception and not become a rule.
In summary, there is room for moderate optimism about the current year. Having said this, investors should be aware that duplicating the annual-digit returns of some investments last year will be quite challenging. It is likely that 2021 will also be a year of market rotation, toward those sectors that underperformed last year.
The writer is CEO of Peilim Portfolio Management.