Article / December 4, 2020

COVID-19: 3 Investment Shifts That Aren’t Going Away

The COVID-19 crisis has people at the end of their ropes. 

With cases spiking again in many countries and new lockdowns looming, it seems like the pandemic will never end. 

But it will end. At some point, there will be a vaccine, people will get it, and life will return to some semblance of normalcy. People are starting to see the light at the end of the tunnel. 

For investors, harsh lessons have been learned. The nose-dive taken by markets at the beginning of the year will leave a lasting impression, especially for those who were overexposed to the market. 

COVID-19 will come to an end, but the investment landscape will remain forever changed. Here are three shifts that will endure long after the pandemic. 

The Value of Alternative Assets

Covid-19 sparked a large-scale shift towards alternative assets that will continue even as the pandemic subsides. 

Jeff Nauta of Henrickson Nauta Wealth Advisors outlines the reasoning behind this shift: “Our thesis is, if we can access uncorrelated sources of return, we’ll provide a smoother ride. Especially for clients in retirement, alternatives can dramatically improve the longevity of the portfolio.”

Indeed, we are witnessing a widespread shift in investor thinking that leaves more room for alternative, non-correlated assets than ever before. 

In the pre-COVID world, your typical private investor was encouraged to allocate maybe a quarter of their portfolio to alternative investments. Now, many wealth advisors are suggesting 40%, and many investors are going even higher. 

Gold and other alternatives beat the market in 2020

Not only are investors increasingly looking towards alternatives for diversification, but the type of alternatives gaining prominence is also changing. 

For example, the massive rise in remote employment (experts estimate that 35% of adults in the US now work from home) is raising questions about the long-term viability of commercial real estate.

Residential real estate is also under scrutiny, as remote workers are no longer confined to big-city apartments and can look to greener pastures in other areas.

Farmland, however, is an asset class that is looking especially attractive in a post-pandemic world. COVID-19 has highlighted the importance of investing in basic necessities. While equities have struggled, farmland annualized returns in certain regions have been as high as 15%. 

Farmland has generally outperformed other asset classes , especially during times of crisis.

The pandemic has taught investors the value of holding real, alternative assets that are insulated from market volatility. Among these, farmland stands out for its true non-correlated nature. 

Opportunities in Emerging Markets

Something interesting happened to emerging market currencies earlier this year, just after the pandemic crisis crushed global transportation and created an unprecedented oil glut which briefly dropped prices to negative levels. 

Emerging market currencies, especially in countries that rely heavily on oil exports, rose sharply against the dollar. The Colombian peso, for example, shot from 3,300 to 4,200 to the USD – an  increase of over 25%. 

Although these rates are experiencing some correction, the message is clear – there are significant investment opportunities in emerging markets. 

It’s been noted that inflation generally hits emerging markets before developed ones. If that’s the case, then there’s an opportunity to invest in emerging markets while their currencies are devalued but before inflation hits the US and Europe. 

And make no mistake: with the massive levels of quantitative easing undertaken by central banks across the world, inflation is coming. Investors are very wary of the coming inflationary environment.

Abdallah Guezour, Head of Emerging Market Debt and Commodities, predicts that inflation could jump to 4%-6% in the next five years, noting that “An inflation scare could also start in the US. Broad US dollar strength in recent years has been deflationary. The US dollar has been supported by a favorable interest rate and growth differential – both are now disappearing.” 

With inflationary pressures on the rise, many investors are looking to emerging markets to ride out the storm. Countries like Chile, Brazil, and Colombia are attractive, especially for their growth potential as exporters. 

A Shift Towards Sustainable Investing

The pandemic has caused sustainability issues to jump to the forefront of investor thinking. Notably, sustainability-focused portfolios and funds. In terms of equities and bonds, sustainable investments lost less, and returned more, than their conventional counterparts. 

Larry Fink, the titanic leader of Blackrock, stated his commitment to sustainability earlier this year, saying “our conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. 

A report by Morgan Stanley notes that, “for the full-year 2019, sustainable equity funds outpaced traditional portfolios by a median of 2.8%, while sustainable taxable bond funds outperformed their traditional peers by a median of 0.8%.”

Indeed, the pandemic crisis has shown us that sustainability and ESG-focused investments can provide better risk/return outcomes, as risk is growingly perceived as a result of ESG and sustainability factors. 

For research analyst Susan Joho, the pandemic was a “baptism by fire” for the ESG space. “The corona crisis has reinforced demand for sustainable investments. It served as a reminder of how fragile our systems can be to unfamiliar shocks and thereby strengthened the desire to support organizations that are actively helping to reduce imbalances.”

The success of sustainable investments during the crisis will not soon be forgotten by investors. Taking a broader range of factors into account during risk assessment will help avoid the shock of the next crisis, whatever it happens to be. 

Long Term Thinking

Whose portfolio performed better during the crisis? The investor who panicked when markets began to tank and sold off much of their assets, or the investor stayed the course, bought when the market was low, and kept an eye towards the recovery?

The pandemic crisis was much more lenient towards those who were investing towards the long term. While there is always some short-term gain to be made in times of crisis, looking towards recovery, and being aware of the long term changes it implies, is a more rewarding strategy. 

As the global economy recovers from COVID-19, people’s lives will begin to return to normal. But for investors, it would be unwise to ignore the lessons of the pandemic.

Read more from Farmfolio. 

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