COVID-19 Market Scenario's

I have been actively talking with all clients about how their portfolio is positioned during these uncertain times.

Having a plan and being comfortable with it helps when markets are volatile.

After all, nobody can control the markets, but you can be prepared.

Below are 3 Market Scenario's I'm thinking about behind the scenes for clients on how best to be positioned going forward.        

 

Base Case Scenario

The Base Case Scenario is the average expectation including assumptions. 

In this scenario, world infection rates peak in the summer and economies return to work gradually. 

However, without a vaccine or without meaningful medical developments, there is ongoing risk that the economies will fall back into some false start in the fourth quarter (October-December) as there are increased risks that the virus infection rate may increase again.  

The world economy would have some false starts potentially, financial markets to remain volatile, and market sentiments to remain somewhat fragile given these expectations.    
 
If this scenario happens, I will favor a meaningful position in clients portfolios to credit assets.

Credit assets are various ways you can invest in debt of companies, governments etc.

The credit market is larger than the stock market, so traders look for strength or weakness in the credit market to signal strength or weakness in the economy.

Credit assets tend to be the leading asset class out of recessions, so in this twelve-month hypothetical period of uncertain market condition, credit markets will offer the most attractive risk premium and buy-and-hold investment thesis in this type of scenario.
 
Within the stock market, I will be looking for opportunities in the U.S. over international or emerging markets as this environment the dollar will remain largely a strong currency.

Favour growth over value, large caps over small caps, and a tilt towards defensive equity funds and factors such as low volatility and quality.

 

Bear Case Scenario

Assume the world economy does not return to work as smoothly as expected in the summer months. 

This would lead to struggles from the beginning of the summer, until the fall and through the winter. 

Occurrence of ongoing viral outbreaks might require ongoing lockdowns and quarantines in the different parts of the world. 

In the Bear Case Scenario, the markets might experience broad base of risk avoidance, with the out-performance of defensive and relatively defensive assets classes (Ex. utility and healthcare companies)

The investment options are more limited in a bear market.

I would reduce clients exposure to the markets and focus the overweight exposure to long dated government bonds, high quality investment grade bonds and cash.

The underweight to the stock market in this scenario would be more meaningful and the underweight to riskier credits as well.  
 
Areas that are likely to under-perform are most emerging markets and developed markets outside of the U.S. as the U.S. dollar might remain strong in these environments. 

Overweight defensive equity factors, such as low volatility, quality, or momentum, as this regime may continue more steadily throughout the next twelve months.

Favor growth over value, large capitalization stocks over small caps.           

 

Bull Case Scenario

Under the Bull Case Scenario, infection rates would plateau this summer and possible new developments on treatment.

The massive unprecedented injection of money from central banks around the world could take markets to new heights within twelve months.

Economic data might improve throughout the year with people returning to work and spending to resume. 

The recovery in a bull scenario would happen in the second half of 2020 and sustain into 2021.

Lockdowns or quarantines to control the virus would not be needed because of the plateau in cases.

Money that was on the sidelines from the pandemic would start to come back and support a further market increase.

I would consider positioning clients in sectors more favorable for a market recovery such as technology and consumer discretionary.

Weighting to bonds and cash may be reduced by switching to higher yielding companies that have a solid financials.     

Bottom Line:

I keep my clients up to date on how their portfolio could be affected during these volatile times.

It is important to review scenario's like these to know how to potentially protect and profit in your portfolio over the coming months.

Remember....time in the market, not timing the market is what counts.