Focusing on an Eventual Rebound

I know it is hard to think about potential investment opportunities now, when it seems like the news surrounding the coronavirus pandemic is only getting worse. Yet I consider it my job as an investment strategist to do just that. Given how grim the near-term outlook is for the economy and corporate profits, it may surprise you to know that I believe some of the best investment opportunities in this generation are being created right now.

I assure you, I’m not trying to sugarcoat what’s happening to the global economy due to this pandemic. Millions of people, including some close to me, are going through great hardship and stress, and I’m troubled by that on a personal level. But the worst economic outcomes may have already been priced into markets and I can’t let fear and uncertainty distract me from my job, which is to look for opportunities and manage risk for our clients.

As I wrote in late March, it’s not too early for investors to start gradually adding equities to their portfolios (preferably via an actively-managed fund), even though markets are likely to remain volatile for the next few months. Here, I wanted to mention some additional themes I’m focusing on that involve some hard-hit asset classes.

Commodities, for example have been dragged down, as the economic contraction has curtailed demand, oil prices have collapsed and the U.S. dollar has surged, making many commodities more expensive in some countries. Currently, the Bloomberg Commodity Index sits at a 46-year low.

I think geopolitical negotiations could lead to a reversal in the price of oil, but my main reason for endorsing commodities is because they are tied to the economy, which I expect to start to recover later this year. I also expect the dollar to weaken, which makes dollar-denominated commodities cheaper for much of the rest of the world, and inflation to pick up once the worst of the health crisis is over and stimulus starts to have an impact.

Another area of focus: high yield bonds. These securities are issued by companies rated below investment grade. While some of these heavily indebted firms may fail this year, the asset class seems to present better potential opportunity than it has in decades. Bond prices move inversely to yields and currently nominal yields in many cases are over 10%. There is potential for high total returns for investors who can “separate the wheat from the chaff” among high yield bonds.

There are hard-hit sectors where risks seem outsized currently. For example, I suggest avoiding companies developing U.S. energy infrastructure. They tend to have a lot of debt and it appears that pipelines in some key regions in the U.S. may have been overbuilt.

Hard as it may be to see in these dark days, there are reasons to be hopeful: Science can lead us out of this health crisis and huge amounts of fiscal and monetary aid have the potential to cushion some of the worst impacts.

Try to remember that this sudden economic stop is a very unique event. I believe the pain of two to three years is being compressed into two to three quarters. The rebound certainly isn’t yet at hand, but I am confident we will get there eventually and that it may be stronger than many expect.