Investing in a pandemic

There are challenges and opportunities for investors as they navigate the markets during the Covid-19 crisis, writes Andrew Strange

Perhaps the most recent example of a pandemic on the current scale is the Spanish Flu that began in 1918 and few people alive have ever faced an investment landscape like the one that is apparent today. The Covid-19 crisis has brought about fundamental changes, from the enforced closure of businesses and the ‘rule of six’, to expansive government intervention in financial markets.

In March, the FTSE 100 recorded its biggest quarterly fall since Black Monday more than 30 years ago, with shares in the UK’s biggest companies plunging 25% as lockdown halted economic activity. There were record

Children wearing face masks during the 1918 Spanish Flu pandemic

outflows from retail funds as investors took fright, yet the following three months saw confidence return and £11.2 billion ploughed back in – more than in the whole of 2019. Then, amid warnings of a second wave and new restrictions, the market fell again in September.

In the face of the difficult economic conditions caused by the virus, countries around the world have committed huge sums to economic stimuli to protect jobs and businesses – in July, the UK Treasury announced such measures had already cost the country £190 billion. Some governments have gone so far as to intervene in the bond and interest rate markets, and some central banks have purchased equities and high-yield bonds to stimulate the economy, but the impact on the markets when such schemes are rolled back remains unclear.

The erratic stock market and the unpredictable response from governments and regulators will undoubtedly persuade some nervous investors to take their money out and wait for better times before they return. This could mean missing growth opportunities in a market rebound, however, and severely impact their long-term returns. Simply missing the 10 best days in the S&P 500 in the 20 years to December 2019, for example, would have seen a $10,000 investment grow to just $16,180 instead of $32,421.

Experience tells us, therefore, that managing investments carefully through the pandemic and seizing opportunities when they arise is likely to be the best option for long-term growth. Sanlam’s investment process is designed to deal with volatile environments and our analysts swiftly identified and quantified our exposure to the crisis, allowing action to be taken where required. We are focusing on sectors likely to be resistant to the impacts of the pandemic and carefully assessing which companies will be able to cope if even stricter restrictions are imposed on their operations.

“We’re very focused on essential services and on businesses that shouldn’t be affected or disrupted too much by what’s going on,” explains Chief Investment Officer Phil Smeaton. “And where we are invested in companies that are having to deal with new rules and changes, we’re looking at whether they have strong enough balance sheets to get them through difficult periods.”

Critical infrastructure

Critical infrastructure and essential property that provides key services for society are likely to be among the most resilient investments. These include the buildings that house internet servers, roads, hospitals and renewable power plants, as well as residential housing. “The need for housing doesn’t go away because we’re in a pandemic,” says Smeaton. “You might not go on holiday any more but you are still going to need somewhere to live. Student accommodation could be a good investment for example.”

And while the economy may have suffered under the pandemic, certain companies with offerings suited to the ‘new norm’ have done extremely well, such as Amazon, Google and Facebook. Microsoft has also seen the widespread adoption of its video technology with Microsoft Teams. And beyond these well-known examples there are a host of others, including healthcare companies like Roche and AstraZeneca, or gaming companies such as Electronic Arts and NetEase.

Constructing portfolios

Smeaton says that success in the current environment requires carefully constructed portfolios that are designed

Demand for housing remains, even during a global pandemic

Photos: Alamy

Some digital services have thrived during the Covid-19 crisis

to ride out a difficult market and are poised to take advantage of opportunities. This requires every asset to be carefully chosen and to have a specific role to play. Sanlam, for example, may include some assets that are a drag on performance in the good times but if the economy suffers, they will provide protection, reducing risk by rising when other assets fall.

“In the pandemic, investment is extremely complex and the issues are very difficult for individuals to assess,” says Smeaton. “It’s easy to get swayed into some opinion about one of these risks by a news headline without being able to fully assess the true impact something might have. It would be really difficult for an untrained investor with limited research time to do that kind of analysis on those risks by themselves.”

Of course, if a vaccine were developed it could allow investors to get back to normal. “A number of our holdings are either developing a vaccine or developing tests for Covid-19,” says Smeaton. “Johnson & Johnson is very big in that regard and Roche is working on developing tests and we are obviously very supportive of the work they do.” But there may be multiple mutations of the virus and we don’t know yet if a vaccine will work on all strains. This uncertainty means that Sanlam is likely to be focusing on businesses that can operate successfully in a pandemic world for some time to come.

Calm in a crisis

Sanlam experts have a great deal of experience of navigating the markets and manage client portfolios in a way that most individual investors would be unable to do, because of either a lack of time or knowledge. Here are five key steps they are going through during the pandemic.

1. Identifying investments that are likely to be resilient during the crisis, such as essential infrastructure and residential housing. 2. Researching which companies are likely to thrive through the pandemic, from

Amazon to Microsoft and many more. 3. Identifying which companies will be able to cope if they are forced to close because of an outbreak of Covid-19, paying careful attention to company balance sheets. 4. Understanding the risks posed by government interventions, from printing money and purchasing bonds to providing loan guarantees to banks. 5. Creating portfolios of diverse assets designed to be resilient in a variety of scenarios, whether the market rises or falls.

Investors should focus their attentions on staying safe and well and should seek expert advice to see their portfolios through the effects of Covid-19 on the financial markets. There will be better times ahead for investors and society – even the tragedy of Spanish Flu eventually came to an end and ushered in the boom times of the ‘roaring 20s’. n

Find out more

If you have questions about your investments, ask your financial planner or portfolio manager, or email us at getintouch@sanlam.co.uk