The Covid-19 pandemic has shocked global economies, with the International Monetary Fund (IMF) warning that the world is likely to experience “its worst recession since the great depression” in 2020.
The IMF is projecting global growth to fall to -3 per cent in 2020, based on the assumption that the pandemic and the required containment peaks in the second quarter in most countries in the world, and then recedes in the second half of this year.
“The current Covid 19 crisis has been of an unprecedented scale with impact seen not just on the number of fatalities around the world, but also on the global market scenario,” states Vijay Valecha, chief investment officer at UAE-based investment firm Century Financial.
“A traditional safe haven like gold, which was considered as the best asset in volatile times, also fell during the initial market rout. Similar was the case for US treasury bonds that fell on a knee jerk reaction.”
In such a scenario, where volatility remains at its peak, investors in the UAE and globally are struggling to comprehend market trends. Despite the turbulence in the market, there are several pockets of opportunity.
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According to Valecha, in the current environment, energy companies are interesting to explore from an income perspective.
“Although these are uncertain times for sure with crude oil futures plunging to negative territory, we should however not lose sight of the long-term perspective. Currently the world might need just 75 million barrels per day. But within 12-18 months or at 24 months in the worst-case scenario, the world will be back to its normal self and will again need 98-100 million barrels per day,” he explains.
“Another sector that is likely to be a top pick could be the tech sector. Stocks for blue chips like Amazon, Apple and other top names have seen their valuation quickly rising from their March lows. With countries across the world implementing social distancing on an unprecedented scale, the role of physical and virtual tech gadgets and services is only likely to increase, thereby increasing their demand and consumption.”
Valecha also suggests considering good quality blue chips in the healthcare and pharmacy sector that have had a past historical record for consistency such as Johnson & Johnson.
“Stronger companies will survive this turmoil and reward investors with income and capital appreciation,” he stresses.
Geographically, Valecha remains bullish about South East Asia.
“The region is likely to bounce back strongly purely on the fact that underlying demographics suggest huge demand consumption once the economies start reopening. Countries like China or India are likely to see huge build-up of past backlog orders and new contracts once things start to get normal,” he explains.
“Although in the initial phases, the economic cycle would be extremely slow to respond to new aggregate demand, the situation should improve lot better once supply chain starts functioning as per its capacity.”
However, while there remain several lucrative avenues for growth, the key thing for investors at this stage is to critically consider their liquidity positions. The crucial thing right now is to have sufficient cash in hand/liquidity to weather out the crisis.
“While diversification is always a key theme, the current crisis points out to the fact that one simply cannot stay 100 per cent invested across all assets and maintain no immediate liquidity in form of physical cash,” Valecha stresses.
Before looking at the returns, investors need to proactively weigh out the risks.
“We at Century have managed to ensure that the client is made well aware of the current market structure and underlying risks associated with it. These uncertain volatile times have seen many big brokerage houses incurring huge losses associated towards clients’ trades. Proper risk management is the need of the hour right now,” he adds.