Investment industry

May market outlook: the post-pandemic financial behaviours

Richard Dunbar

Richard Dunbar, Head of Multi-Asset Investing at Aberdeen Standard Investments, looks at some of the ways the pandemic has changed investor behaviour and markets, and what we should learn from this.

The pandemic has dealt many financial blows. Governments and central banks have scrambled to help companies and economies back on their feet. Investors have watched on, changing which ‘side’ to bet on. And others who haven’t previously invested are now considering whether to do so as they search for ways to improve their financial security.

But as we know, with more opportunity for growth comes more risk - if your client’s money is invested, its value can go down as well as up and could be worth less than they paid in. And while many factors are supporting markets currently, there have been some timely reminders of the need to do your homework when it comes to investing.

The pandemic may have changed financial attitudes and behaviours

Research from Standard Life1 provides some interesting insights into how the pandemic has caused a change in the financial attitudes and behaviours of some people:

  • Of all the measures tracked*, the Covid-19 pandemic has had the biggest impact on people’s feeling of financial insecurity. This is particularly marked amongst those in the 35 to 54 age group. As a result, more are reporting being less organised with their finances and also more worried about them.
  • There’s lower confidence in the value of cash/savings accounts, given the lower interest rates available, and increasing favourability towards investing in stocks and shares. The under 35s are already beginning to move more into investments, and other ages are also keen to do so.

For those already investing, even the more experienced investors out there, it’s easy to be lured into short-term decision making – especially during an unprecedented crisis like the pandemic, where markets have seen such volatility.

*Covid-19 was the biggest contributor to feelings of financial insecurity, followed by low interest rates and inflation. Other contributors, in order, included Brexit, market volatility, domestic political issues, non-British political events. 

Investors are ploughing money into markets – especially into ‘value’ stocks

As I talked about last month, at Aberdeen Standard Investments, we’ve revised up our forecasts for economic growth and expect three years of above-trend growth. This is mainly based on the widespread vaccine rollout allowing a progressive easing of lockdowns, and additional large-scale financial support in the US. Basically, there’s considerable room for improvement – as we all start to get out and spend again – from a low starting point.

The expectation of a burst of economic growth has led investors to expect a similar improvement in company profits. Most major stock markets are up about 10% so far this year2.

But there’s been a change in the types of companies that investors are investing in. Over the last decade, a time of low growth, investors have favoured companies that they believed offered the potential to deliver superior profit growth over the longer term – which they hope is underappreciated by the market. Technology companies are the obvious example. And as we all know, the pandemic caused a significant shift to ‘life at home’, which has further fuelled interest in (and the price of) such stocks.

But over the last few months investors have been on the hunt for undervalued companies (those they believe are trading at a price below what they’re actually worth) that will benefit from an end to lockdowns. Examples include airlines, restaurants and leisure companies. Similarly, oil and mining companies’ share prices have picked up as investors feel more optimistic about prospects for economic recovery.

But be vigilant about short-term value

As I’ve cautioned previously, care is merited when it comes to a lot of these ‘value’ stocks. They are sometimes cheap for a reason. Many of the issues that previously made investors wary of these industries are still there; more goods being produced or services being offered than are being demanded, new and tightening regulation, and an increasing focus on environmental, social and governance issues – to name but a few.

Similar care is merited in some of the newer companies coming to the market, as we’ve seen most recently with Deliveroo. While there may be considerable growth potential for its business model, the manner in which staff are employed led investors to be more circumspect. A sign of investors not just looking at ‘what’s done’, but also ‘how it’s done’.

And so, as ever, it means that you need to do your homework, to carefully analyse each individual company, no matter which industry it sits in, how ‘undervalued’ it may seem in the short term, or the abundance of opportunity it may appear to offer in the longer term. At Aberdeen Standard Investments, we focus on quality – finding companies that are well managed, have resilient products or market positions, as well as strong cashflows and balance sheets. Recent events have reminded us of the importance of this approach – let’s take a look at these.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Take note of timely reminders

Over the decades we’ve seen that being invested in the wrong company or country can go wrong – with promise of higher rewards not being delivered after taking on the higher risk (often accompanied by a lack of transparency). And three recent examples are perhaps timely reminders of this.

At a country level there’s been Turkey. While investors have always been cautious about the potential economic and political risks associated with investing in Turkey, they weren’t prepared for the respected central bank governor to be fired. The unexpected news caused Turkey’s currency to plummet. A reminder to all that with higher reward comes higher risk.

Then there was the collapse of US hedge fund Archegos Capital Management – a reminder of the amount of borrowing being used in the global financial system and the limitations of some of its risk management systems. Several large banks were impacted by the failure of Archegos and have reported significant losses. If there’s any consolation from this sorry tale, it’s that the capital buffers now required by banks are significantly greater than they were at the time of the global financial crisis and have proved more than sufficient to cope with these recent events.

Finally, there’s Greensil Capital, one of the biggest providers of supply chain finance; lending money to companies to pay their suppliers. It filed for bankruptcy after its insurers and bankers withdrew support. This is an old business model (trade finance or factoring, which has been around for as long as trade itself) which sometimes has a place – but too much debt and too much concentration left it vulnerable to changing market and economic environments. Unfortunately, an age-old story, but one that has fortunately not proved a market-wide problem.

Fortunately, in all these cases, banks, insurers and their investors have been able to absorb these losses. So these events have not had broader ramifications for economies or markets. It’s also worth reminding ourselves that the actions of these companies and the results that have come from them are the exception rather than the rule. But they’re a reminder that investors need to take care in a market where interest rates are low and central banks are flooding money into the financial system. In other words, know what you own and have a strong view as to what it’s worth.

 

1Standard Life Financial Attitudes and Behaviours Research March 2021, 2,100 participants responded between November and December 2020.

2Source: Bloomberg, 19 April 2021, US +11%, Europe +13%, UK FTSE 100 +8%, Japan + 8%

The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your clients’ investments can go down as well as up and may be worth less than was paid in. Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed and actual events or results may differ materially. Information is based on Aberdeen Standard Investments’ understanding in April 2021.