The global economy is bouncing back. COVID-19 infection rates are dropping as more people are getting vaccinated. We are now in the reflation phase of the recovery: high growth, rising inflation, low interest rates, and lots of volatility. How do we then invest in a post-pandemic world?
With interest rates at historic lows, we are positioning portfolios for short-term volatility and future growth. We are exploring ways to take advantage of this low-interest-rate environment to boost portfolio returns.
Our world continues to become more digital. Governments continue to put more effort to invest in greentech. We are also seeing a shift of economic power from West to East. We see opportunities in emerging markets, particularly Asia, as a way to position your portfolio for potential growth.
Are your portfolios structured to win in the long term?
According to a 2021 economic study by UBS, global economic activity is poised to bounce back from the pandemic, at the same time as the central bank and fiscal stimulus remain substantial. All of this should help real GDP in 2022 be higher than in 2019, by 9% in the US, 3% in the Eurozone, and 18% in China.
Source: UBS, as of March 17, 2021
We believe the divestment of tech and growth stocks will continue into other previously distressed areas of the market (due to COVID-19). All your portfolios should have exposure to financials, industrials, and materials. This diversification would have helped soften the underperformance of the tech sector in Q1.
While this divestment will continue, we are not concerned with the short-term underperformance of the tech sector. The rise in digital subscription models throughout the pandemic will stay. We see opportunities in AI, robotics, e-commerce, cloud, and everything in-between, including music streaming and fitness. Although we expect the tech sector to underperform cyclical in the near term, we remain confident that you should still benefit from long-term tech exposure.
Seek opportunities in Asia
Over the past decade, the Asian economy has grown significantly, with China leading that growth. Yet, many investors still have no exposure to the region. China is now the second biggest global economy; it is simply too big to ignore.
Chinese equities have been under a lot of downward pressure in 2021. This includes rising US yields, domestic liquidity tightening, and a conservative 2021 GDP target. However, we are holding our view that China and many other Asian countries such as Korea, Taiwan are home to some of the most disruptive global companies in the world. Bottom line: the recent correction in Asian equities has brought prices to levels that are more attractive to acquire for long term growth.
Taking advantage of low-interest rates to boost returns
We expect interest rates to remain low. This means that holding cash or high-grade bonds in your portfolio will lose you money in the foreseeable future. We encourage you to put cash to work, diversify your bond portfolio, and hunt for alternative rates of return. Here are 3 different strategies to boost your returns:
- Invest in dividend-paying equities To boost your portfolio returns, we recommend adding dividend-paying equities to your portfolio. As earnings recover, the companies that cut dividends in 2020 will likely be in a stronger position to restore paying dividends.
- Leveraged investments Borrowing to invest is also an effective way to boost your returns when interest rates are low. Always speak with your Financial Planner before implementing any investment strategy involving leverage. We wrote on the strategy here.
- Investment life insurance We also recommend using investment life insurance to replace a portion of your conservative portfolio. The investment value within this insurance is tax-sheltered, never goes down, always goes up. If you have a term life insurance product, it is time to consider converting. We wrote on the strategy here.
As always, to learn more about investing in a post-pandemic world, you can chat with us here.
Disclaimer: This publication is for your information only. It is not an offer, or a solicitation of an offer, to buy or sell any product.