Investing has become a game of chicken in the eyes of some investors. Has COVID-19 become a buying opportunity? Have we seen the bottom, or is the worst yet to come? It’s hard to make any solid predictions in this unfamiliar territory – investment markets have experienced a health crisis rather than being undone by poor fundamentals, such as in the global financial crisis. The essentials, defensive assets and growth trends should be considered by advisers exploring the opportunities to tilt the satellite portion of their clients’ portfolios.
Incorporating the essentials
There are a number of areas which may benefit from the current situation – or if not benefit, then at least be largely able to continue normal operations.
Companies in the consumer staples sector is an easy starting point. People need basic supplies to live and supermarkets like Coles and Woolworths continue to operate and have seen increased demand in these times. There are even pockets to consider in the consumer discretionary sector as people use lockdown to carry out home based activities or upgrade the technology they use to work from home.
Infrastructure, such as railways, energy suppliers and telecommunications, is a sector that continues to operate in periods of volatility. These types of companies normally have monopolistic fee structures and have very high barriers to entry with predictable revenue streams. This means they aren’t expected to rise as much in good times but are less likely to be materially impacted in the bad times. In the current situation, telecommunications has benefitted from an increased dependence from a population working from home. An ETF like ETFS Global Core Infrastructure ETF (ASX code: CORE) can offer exposure to global infrastructure companies in a client portfolio.
Defending against volatility
Defensive assets like gold or silver can offer a buffer in volatile markets. Gold in particular has been used as a safe haven asset in the past for its low and at times negative correlation to other asset classes. You might choose to use an ETF like ETFS Physical Gold (ASX code: GOLD) or ETFS Physical Silver (ASX code: ETPMAG) in the core of a portfolio or as an additional satellite tilt.
The volatility of COVID-19 has reset markets, and the time might be favourable for some investors to access growth trends at more favourable valuations.
Technology trends have particularly accelerated during COVID-19, with ecommerce and online entertainment experiencing spikes in use. ETFs such as ETFS Morningstar Global Technology ETF (ASX code: TECH) or ETFS FANG+ ETF (ASX code: FANG) offer access to the companies within this theme.
Biotechnology may be a longer-term trend but it is also particularly topical at the moment in the hunt for vaccines and a cure for COVID-19. The ETFS S&P Biotech ETF (ASX code: CURE) accesses this trend and offers exposure to some of the key players currently working against the virus, including Gilead, Regeneron and Moderna.