At a glance
Global markets have staged a comeback after the coronavirus-induced slide and as economies reopen. However, investors are awakening to a world that is more indebted, less global, and more digital. Now is the time to “reset for recovery” – as investors will now need to focus on finding income, managing volatility, and differentiating winners from losers.
The road to recovery
Economies around the world are gradually reopening from their self-imposed lockdowns in the wake of the coronavirus pandemic. To stimulate the recovery, central banks have reduced interest rates to, or below, zero, and embarked on unprecedented quantitative easing programs. In this environment, the challenge to find income is made even more pressing given we think central banks may be willing to allow for a period of moderately higher inflation (e.g. 2–5%) in order to manage debt burdens.
Over the past months, government bond yields have fallen sharply in response to lower interest rates and investor demand for safe havens, and remain far below prior levels. We don't expect yields to change materially, posing a challenge for investors looking to earn income and manage portfolio volatility. In short, we believe cash and the safest bonds are likely to deliver negative real returns for the foreseeable future.
Key investment takeaways:
- Although markets have recovered the majority of their losses, we have entered a new paradigm.
- It is time to reset for the recovery. The world after COVID-19 is one more indebted, less global, and more digital.
- Investors will need to focus on finding income, managing volatility, and differentiating winners from losers.
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