Throughout the coronavirus crisis, Funds Europe presents some of the best market commentary from fund professionals. Today, Javier Lendines, managing director of Mapfre Asset Management – the funds arm of Spain’s largest insurance company – focuses on three key questions investors need to ask to deal with Covid-19.
The first thing I would advise is to build a macroeconomic scenario for the coming quarters and then to ask yourself as an investor: What is the time horizon of my investments? what is my risk tolerance? And how much money am I willing to lose?
As a manager I think there are as many portfolios as clients, but for those considering investing in a medium-term horizon I offer the following observations:
While official rates are likely to remain at low levels for the foreseeable future, I would avoid high-term fixed income investments because, in the face of an increase in asset market returns, the price of assets tends to react to the downside. The reasons why fixed income assets are expected to behave poorly over the next few years are as follows:
Fixed Income
The public debt interest rates of the major Euro area economies are close to historic lows. The expected increases in public deficits (unemployment subsidies and lower tax revenues) imply greater funding needs by governments, so the supply of public debt will be increased by lowering its price.
Private Fixed Income
Regarding private fixed income investments, deteriorating credit quality, rising bankruptcies and higher financing costs mean they are generally an asset to be reduced in portfolios. Only the deep knowledge of issuers, prioritizing under-indebted companies and reduced exposure to the cycle could justify investing in certain issuers.
Equities
After a fall from the year highs of more than 40%, if the investor’s time horizon is medium-term, then current levels are attractive to take positions in the market.
While we don’t know what the outcome of this year will bring, the homogeneous behaviour of indices and sectors is in question. In recent years, a technological revolution has caused certain companies to adapt and implement changes in how they do business, and these are the companies which will receive a greater revaluation in the markets.
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