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Shift equity focus from tomorrow to a year from now

COLUMN: Having the right equities and the right share of equities is important in times like these, says investment strategist Lars Skovgaard Andersen.

“The stock market is a device for transferring money from the impatient to the patient,” says a classic quote from US investor Warren Buffett.

Image: Lars Skovgaard Andersen, Investment strategist, Danske Bank 

However, patience is a difficult virtue to master at the moment as we are constantly reminded of the coronavirus’ negative impact on people and economies, and some days experience very pronounced falls in equity market prices. Nevertheless, right now is the moment you as an investor need to shift your focus from short-term developments and look further ahead.

Our key message in these difficult weeks is that you should stick with your strategy – ie, the overall allocation between equities and bonds that suits your investment profile. Common to all historical crises is that equity markets have always rebounded strongly, and we expect that will be the case this time too. Furthermore, we believe the worst is behind us in terms of the equity markets.

Survival of the fittest
However, sticking to your strategy does not necessarily mean remaining passive. On the contrary.

If you have placed your money in an investment solution via Danske Bank, then professional portfolio managers will ensure your investments are continually adjusted. However, if you are investing your savings yourself, you need to ensure your money is still invested optimally. We provide some input on this here:

At Danske Bank we expect the shutdown in the global economy will have an extremely negative effect on the economy for a couple of quarters, and that we will then see a recovery in economic activity in the course of H2 2020. However, some companies will probably not survive the corona crisis or emerge at the other end in a weakened state. In contrast, the strongest and most cushioned companies will have the best prerequisites for pulling through the crisis and potentially gaining ground from competitors. 

We see attractive investment opportunities right now for long-term investors.

Lars Skovgaard Andersen 

Investment strategist, Danske Bank

Quality equities
Plummeting equity prices have pulled all companies down, and here at Danske Bank we estimate that current prices now offer attractive opportunities to buy into a number of companies with strong brands, low debt, good management – and under normal conditions stable earnings growth.

We often term companies with these characteristics quality equities, and they are generally well equipped to survive the economic hard times that lie ahead. Hence, this could be a good point to adjust the composition of equities in your portfolio to obtain a more robust base of quality equities – and if you have cash that needs to be invested, quality equities are of course also worth looking at.

While it may be difficult to imagine right now, there will be a normal everyday life on the other side of the corona crisis where the wheels of industry again turn around and consumers and companies spend money. So do not focus on price movements today or tomorrow, but look 1, 3 or 5 years ahead and focus on, for example, the solid companies that can still be expected to have a strong position at that time. 

As Warren Buffett has also said on the importance of being patient and long-term as an investor: “Someone is sitting in the shade today because someone planted a tree a long time ago”.

Lars Skovgaard Andersen

The right share of equities 
At times like this it is important not only to have the right equities in your portfolio, but also the right share of equities. If you have both equities and bonds in your portfolio, the deep fall in equity prices over the past month has probably shifted the balance, so that equities now account for a lesser share of your portfolio than prior to the corona crisis – and potentially also a lesser share than you would like and your strategy would dictate. In that case, you need to rebalance your portfolio, otherwise you will have a lower risk level overall in your investments and enjoy less of the recovery when equity markets turn.

Rebalancing means selling off bonds and buying up equities, so you again achieve the desired allocation between equities and bonds. However, doing this gradually can be a good idea, as it is impossible to say precisely when equity markets will bottom out. Going forward, days with significant price rises could very well be followed by further marked price falls. Uncertainty on the future trajectory of the coronavirus – and financial market jitters – remain very high.

Nevertheless, looking at the bigger picture, we see attractive investment opportunities right now for long-term investors – and remember you should consider your investments as a marathon, not a sprint. Or as Warren Buffett has also said on the importance of being patient and long-term as an investor: “Someone is sitting in the shade today because someone planted a tree a long time ago”.

This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.