During the Covid-19 pandemic, one of the most difficult decisions for investors has been shifting from defence to offence — and determining when to shift back.
As the coronavirus outbreak hit North America in March, it was important to move portfolios to a defensive position, said Michael Sager, vice-president of multi-asset and currency management at CIBC Asset Management.
That meant reducing risk with alternative strategies that perform differently from the core equity-bond portfolio, and shifting into assets that could outperform, such as gold and option strategies.
“I think the important thing was to have flexibility and to use that flexibility to direct your risk budget into strategies where conviction was highest,” Sager said in a mid-September interview. “And those typically were defensive strategies.”
But markets hit bottom in late March, and investors were forced to shift strategies to capture the tremendous rebound that followed. The S&P 500 is up more than 5% year to date, while the S&P/TSX 60 has also largely recovered, down just more than 3% this year.
Sager said this has meant taking on more risk to exploit opportunities, and shifting “from a more defensive stance to one that’s more pro-cyclical.”
“As risk markets become more constructive, as the cyclical economy has gained momentum and broadened out, so the opportunities to benefit from a pro-cyclical stance have improved,” he said.
“All of that doesn’t mean to say that it’s time to eliminate all defensive strategies and positioning from portfolios — the question more is the balance.”
That balance has included exposure to defensive and safe haven strategies.
Sager said his outlook is “cautiously optimistic.” He sees the global cyclical recovery broadening, with plenty of liquidity for several quarters to come, as well as progress on a Covid-19 vaccine.
But the pandemic remains an economic threat, with cases rising in several countries, and some jurisdictions reimposing restrictions on economic activity.
And then there’s the U.S. election — already a market risk before the October surprise of President Donald Trump being infected with Covid-19.
Sager also noted inflation risk. While both the Federal Reserve and the European Central Bank indicated they’re unlikely to achieve their target rates of inflation anytime soon, he said the longer-term risk on inflation is “skewed a little bit to the upside.”
Because of the huge recovery in equity markets since March, investors now have to be more discerning in their allocations, he said.
“Being exposed to equities broadly and [emerging market] credit broadly makes a lot of sense — particularly in those markets where value opportunities persist, and in EM credit [where] fundamentally attractive carry opportunities persist,” he said.
“But it also means that defensive strategies are sensible.”
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.