The hunt for positive yield will increase during the pandemic recovery phase, leading investors to reallocate portfolios beyond fixed income and equities, writes Vjollca Berisha.
Just months after COVID-19 hit the world with full force, it's remarkable to see some countries already taking their first, tentative steps to economic recovery.
Given the significant financial packages provided by government and central banks globally, yield will be even more scarce for the investment industry and the hunt for positive yield will increase. This will further broaden the investor's need to diversify income and reallocate portfolios beyond the traditional asset class of fixed income and equities.
Alternative asset classes have performed well compared to other asset classes particularly in difficult market phases, when interest rates are low and other unexpected challenges – such as the Lehman Brothers collapse – occur. They are perceived as lighthouses for outperforming investors because they are less correlated to equity and the fixed income market.
Here are my observations and predictions for some alternative asset classes as countries ease out of the crisis.
This asset class is likely to show a positive impact sooner because private equity firms are sitting on a record €2 trillion-plus of dry powder. They're well equipped to deploy capital at more attractive valuations and manage existing portfolios.
We will also see a move towards distressed and special situations strategies. New fundraising for Q2 and Q3 may slow due to investor focus on business continuity plans and investment committee unwillingness to sign off until there is a longer-term view.
Even real estate is an alternative asset class and, even though since the last financial crisis over a decade ago, it has been considered a 'vanilla', buy-and-hold investment.
Companies will need to go through restructuring so the stock market will stay on watch, and bonds were already at near all-time lows. It's unlikely this will change over the next decade and be anywhere near as good as real estate.
Nevertheless COVID-19 will leave an impact. Weaker sectors with high economic sensitivity such as small retail stores and restaurants will see greater declines. High quality real estate with long-term rent and moderate leverage will provide some good protection. Funds largely exposed to this sensitive sector will face difficulty in terms of both valuations and income. However, amid the negative disruption, new opportunities may arise.
Some infrastructure segments – such as airports – are directly impacted by shutdown rules and travel restrictions. Telecommunications and healthcare facilities sectors, on the other hand, are now even more important for investment portfolios due to their resilience.
COVID-19 has had a significant "creative" impact. It has driven digitalization to the next level, from the rapid increase in teleworking to the proliferation of food delivery apps, virtual events and cloud computing. A popular post on social media asks: "Who led digital transformation at your company?" The options given are CEO, CTO or COVID-19.
This sector will have to prove itself and stand firm during coronavirus recovery as it is expected to face challenges, including from low oil prices. Environmental, social and corporate governance (ESG) will remain important as European Insurance and Occupational Pension Authority (EIOPA) requirements will continue, making wind parks integral to institutional portfolios.
COVID-19 alternative investment implications
Unexpected opportunities tend to present themselves during crises of any form, and crisis management has always been fact of business life. This pandemic is set to last for many months while recovery is expected to take years. Now is the time for investors to strengthen their immune systems and be open to more alternative asset classes. They fulfilled their role as smart diversifiers during past crises, and they will do this again. Alternative asset classes offer a stable, resilient source of income.
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Originally published 12 May 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.