Equities or Bonds?
The first quarter and second quarter of 2020
In the first quarter of 2020, between January and March, the coronavirus outbreak brought certain areas of the global economy to a grinding standstill. US equities entered bear market territory, government bond deals dropped to their lowest levels on record and the price of oil collapsed. The Federal Reserve responded swiftly by lowering rates to close to zero as well as providing a liquidity injection and fresh quantitative easing. The Federal Government rolled out large levels of fiscal stimulus to support businesses and workers. Similar measures were taken in the UK where the government committed to underwrite 80% of workers wages. Monetary and fiscal measures were also implemented globally.
In the second quarter of 2020, between April and June, the economic effects of coronavirus will continue to send shockwaves throughout the global economy and likely end the 11 year US economic expansion as it has already done to bull markets and equities. Services industries will face a rocky path ahead from global lockdowns and continued social distancing measures, and unemployment will sharply increase. However, global efforts to find a vaccine to the virus and consumers’ willingness to adapt to the crisis by moving online and supporting local industry should hopefully result in a stabilisation of the global economy and its eventual rebound. For investors, the impact of coronavirus on financial markets, the economy and society present a unique challenge in finding a successful investment strategy which delivers returns in the face of real uncertainty.
The best type of investment strategy?
The US stockmarket had its best month in March since January 1987. In the UK, the FTSE 100 has risen 15% since mid-March. Despite this surge in equities, otherwise known as stocks and shares, cash and bond markets have been the only sectors providing positive returns for investors this year. In sharp comparison, sectors which cover UK income funds and growth funds have not fared as well. A £500,000 portfolio for example, mainly invested in the UK stock market, will be looking at an average loss of roughly a fifth of its value this year. As such, should the owner of an equity focused portfolio invest re-invest their money into cash and bond markets which offer minimal returns but are more shielded from the impacts of bear markets? Or should they stick with their core holdings in shares?
Mark Atherton, the investment editor at the Times and Sunday Times posits that even after record-speed market declines, now is not the time for investors to get out of equities and into bonds. In fact, bold investors should see market falls as an opportunity to buy considerably cheaper equities. After all, in the long term, shares produce a greater return than bonds. Take the past 15 years. Despite witnessing two bear markets during this period — the financial crisis and the European sovereign debt crisis — shares, as measured by the MSCI World Index (a market cap weighted stock market index of over 1,600 global stocks), have outperformed cash and bonds. Place all your trust in the stockmarket and you will have plenty of restless nights but will benefit from the market climbs. Invest only in cash and bonds and you will come out relatively unscathed from economic crises’ but miss out on bull market profits.
Of course, many of the best hedge fund managers will vouch for a diversified portfolio in which risk is spread by investing in a combination of equities and bonds. Ultimately though, share investments remain the best way to achieve sustained growth if one is comfortable with the fact that investments can sharply decrease as well as sharply increase. With enough thought, it’s a trade-off worth making in my view.