Wait before adding to higher-risk assets
Investors should be holding off on increasing equity, credit and real estate allocations as there will likely be better times ahead, an investment consultant advises.
According to AssureInvest, sharemarkets are likely to see further sell-offs “until there is clearer evidence that the health crisis is being resolved”.
AssureInvest director Andrew Doherty said investors should be patient, owing to the fact that the recovery process is likely to take time and they should focus on the short term in the meantime.
“In our direct equities allocations, we are worrying over the short term as a deep contraction is underway, and it will take a while for conditions to approach anything close to normal,” Mr Doherty said.
“Survival depends on strong balance sheets and sustainable cash flows.
“We are focused on the long term by seeking cases where market overreactions provide opportunities to buy outstanding companies offering outright fundamental value.”
According to Mr Doherty, government bonds have rallied since February and less appeal on a longer-term perspective.
“We have some exposure to corporate credit but only to higher quality,” Mr Doherty said.
“Fundamentals in credit markets have deteriorated despite extraordinary monetary and fiscal accommodation.
“Borrowings will leap to offset the fall in revenue. Several companies face ratings downgrades.
“Better buying opportunities may present themselves as the crisis unfolds and sectors such as energy face significant challenges due to the collapse in the oil price.”
Mr Doherty noted that AssureInvest’s strategy in March was to “modestly and selectively” add to Australian equity holdings during the sell-off by favouring enterprises with strong balance sheets.
He also said that, while the recent rebound in share prices was welcome, AssureInvest was surprised by the extent of the move considering the uncertain outlook.
“Consensus has not yet fully factored in the likely hit to earnings and dividends,” he said.
“The equity issuance cycle has only just begun.”