The coronavirus health crisis during the year 2020 has triggered a deep recession worldwide. The big central banks play a decisive role for the investor by accommodating policies to compensate for these risks.
They artificially support the financial markets by flooding them with liquidity and remain ready to implement all kinds of additional unconventional measures.
Most governments have rolled out massive support plans to help their economies hold on until they exit the tunnel. After the brutal shock of lookdown for the world’s economy, the question is what decisions to take regarding investments?
Crises like the one we are currently experiencing have a very interesting feature of presenting investment opportunities at the sectoral level. So while the energy, financials and real estate sectors are still far from their annual peaks, the high tech, health care, biotechnology, and consumer sectors are shattering new highs every week.
By the third quarter, as lockdown became widespread, it became more than likely that the remote tech sub-sector would experience extraordinary growth. The best example is obviously Zoom which sees its flagship product becoming indispensable to most companies. Therefore, video communications have exploded. The company’s stock value rose from $ 70 in February to over $ 300 at the end of August.
The bright spot for investors is the residential home market. The residential home market is gaining a boost during the pandemic crisis. Many people show a desire for greater space. Residential real estate, whose high prices are temporarily shielded from a significant downturn by keeping interest rates low, and liquidity, or precautionary savings, is a pole of stability. The residential housing market in the United States has not seen such a boost for 15 years.
Since the interest rates are at historical lows, investors who might have been content to pursue holding fixed-income securities, have boosted their rates of return by turning to stocks. The only possible way to restore the rates of return which bonds offered is by investing your savings in equities.
The key interest rates and those on 10-year government bonds are negative. They are negating the potential return on money market or bond coupons. Corporate bonds are not easily accessible to individual savers, and specialized funds remain subject to bond management’s many complex uncertainties. Only equities offer the potential for capital appreciation in the medium term, enhanced by possible dividends.
Assess investment decisions according to consumption habits
On Wall Street, the main indices completely wiped out March’s drop. As of September 15, the S&P 500 was up 4.7% since January 1. The technology index, the Nasdaq, gained 25% over the same period.
The US and international equity funds benefit from this growth. The market is especially driven by major digital stocks – Gafam (Google, Apple, Facebook, Amazon and Microsoft). The five Gafam stocks of the American S&P 500 index explain most of this index’s stock market growth and constitute 25% of its capitalization. In mid-September, the CAC 40 had given up another 15% since January 1, and the Euro Stoxx 50 had fallen by 11%.
It seems imperative not to base our investment decisions on a rapid decline or rise in the markets in times of uncertainty. Instead, it is necessary to assess the resulting changes in consumption habits. There will always be opportunities, but it remains to identify them.
Those companies’ stock prices presumed to do well might have an exaggerated valuation, which leads to many risks. On the other hand, also stocks of not so well-performing companies lead to too much pessimism. Therefore, finding the right approach and creating an investment plan is crucial to diversify your portfolio.