Many economists and researchers are forecasting that the world economy and corporate earnings will return to pre-pandemic levels in 2021. But with many broad market indexes already surpassing pre-pandemic highs in 2020, many investors are asking whether it’s too late to buy.
In a report titled "Year Ahead 2021", wealth manager UBS stated that investors should focus on a long-term scenario.
"Tactically, we still think there is plenty of opportunity both in catch-up plays and in structural winners that can continue reaching new highs. But strategically, investors should pay less attention to market timing and more to the long-term picture. So in times of uncertainty, investors should take advantage of volatility to enter markets," the report said.
Co-President Global Wealth Management at UBS, said: "If investing in 2020 was about going resilient, large, and American, we think 2021 will be about going cyclical, small, and global as the sectors and markets most heavily affected by lockdowns start to revive."
"At the same time, as the economy accelerates into the future, investors with an eye on the long term will need to add exposure to the disruptors making our world more digital and sustainable, most notably in greentech, fintech, and healthtech, and among the beneficiaries of 5G rollouts.
Assuming 6 percent annual earnings growth, earnings can be expected to be 5.7x higher over a 30-year horizon; market valuations may change over time, but rarely change by a factor of more than 5x. Given the choice between investing immediately or waiting for stocks to get cheaper, putting money to work for the long term is usually the best choice, the report said.
Protecting against downside risks
Using bonds alone as a hedge for falling equity markets is more costly and potentially less effective than in the past, due to low yields.
According to UBS, investors looking for protection should instead consider a diversified set of hedging approaches.
Investors can consider reducing their overall fixed income allocation and concentrating a greater allocation in longer dated bonds to benefit from their greater interest rate sensitivity. Investors should also consider incorporating dynamic asset allocation strategies, which can adjust their exposure to risk assets based on market conditions, the report said.
The report said that investors can incorporate equity replacement strategies—such as structured solutions with downside protection—to sacrifice some upside potential in exchange for investments that give an asymmetric return profile. It also noted that gold is an attractive hedge in a portfolio, particularly in a low real interest rate environment.
(Writing by Seban Scaria; editing by Daniel Luiz)
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
© ZAWYA 2020