As different countries begin to emerge from lockdown, the world will be a different place — and investors must adapt their strategy accordingly.
Companies with traditional business models will have much more debt and will struggle to get back to past turnover levels. In contrast, many technology businesses have seen big increases in demand for their services as people continue to work and play from their own homes and look set to hold on to much of these gains.
As the virus started to spread, I reduced risk in the FT Fund as much as I could. I gave up on euro area exposure some time ago, and it has lagged behind in the latest rally compared to the US. I cut the exposure to property, as the virus attack is bad news for rents and property values of shops, leisure properties and some offices. Businesses without any turnover cannot pay the rent and will demand lower rents going forward if they are to remain tenants at all.
I also kept the bulk of the FT Fund’s reduced share exposure in the US, anticipating a more vigorous response there from a president desperate to be re-elected. More recently, I have added to the fund’s technology holdings meaning that the US accounts for about two-thirds of the share portfolio. All of this means the FT Fund has had a good performance in a bad down year, and it is down just 5 per cent year to date.
What could happen next depends to a large extent on the central banks.
In the US, the Federal Reserve and the government decided to boost markets in a spectacular way. The central bank has gone on an enormous buying spree to push up the price of government and company bonds, and has already created more than $1.5tn to fund its shopping habit. The US Treasury is borrowing $3tn in just three months to provide cash grants and loans to individuals and companies hit by the lockdowns.
The interventions began as soon as markets melted down, gripped by the fear that many bonds would go under as companies ran out of cash to pay interest or capital back.
Initially, markets worried that the weight of new issues by government and companies would be too great and the downgrades of credit worthiness too oppressive. Yet sentiment has moved rapidly, with markets deciding that “Infinity Fed” would underpin bond prices and keep interest rates on the floor. The Fed seemed willing to double or treble its balance sheet to literally issue trillions of new dollars to sustain bond prices.
The UK and Japan are undertaking more modest versions of these policies. They too have pumped out money in grants and loans and their central banks have pledged to new or enlarged bond-buying programmes.
In the eurozone, it has been harder going. The EU Commission would like to spend and borrow more and provide more cash directly to people and companies, but is limited by the budget and by the reluctance of Germany and some other northern states to approve an increase. The European Central Bank has embarked on a new quantitative easing programme, only to find the German constitutional court is unhappy about what it is doing and is demanding explanations of what it regards as a dangerous policy.
Taking all of this into consideration, I have reorganised the fixed income part of the portfolio. I have sold the corporate bond ETFs, as I am expecting more downgrades and bankruptcies to trouble these markets. Fed money can sustain prices for a bit, but cannot prevent a bond going down or collapsing if the company with the borrowings can no longer pay the bills.
I have increased the fund’s holdings in US Treasuries, as the advanced government whose bonds still offer the best — although small — positive yield. I have also increased the holding in inflation-linked bonds. They are out of favour at the moment as the immediate problem is deflation, with lower inflation figures to be reported. There is a danger in the US, however, that they will not rein in the massive money and credit expansion in time and will allow some more inflation to take hold in due course.
I retained exposure to a range of specialist indices which capture the digital revolution. Businesses in artificial intelligence, cyber, digital technology and cloud computing all stand to do well out of the changes the pandemic is enforcing. These sectors should flourish as people do more at home using remote technology, businesses replace face to face with online transactions, and as communications and advertising move more to the web.
As we move to fewer controls and some recovery, I will add further weight to the indices which can prosper in times of social distancing and more remote working.
Many well established companies face a scramble to cut costs, to husband cash and reduce employee numbers. The shareholders of these groups face cuts to dividends, no share buybacks and governments expecting them to favour employees and customers more highly as the price of accepting state financial assistance. The digital revolution meanwhile has just been given a massive boost, persuading or forcing people to use the technology for shopping, for social life, for entertainment and for business.
Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. firstname.lastname@example.org