In brief
- Today’s challenge facing long-term investors is constructing portfolios in an environment where asset prices appear detached from economic reality amid an unpredictable recovery path.
- Nonetheless, the distribution of potential economic scenarios over the next 12 months is unusually broad. Therefore, investors should consider building portfolios that can withstand a range of future paths.
- The world is in a better place than three months ago as economic activities have picked up. However, recent data suggests that the pace of recovery has slowed down on account of the expiration of stimulus benefits.
- The threat of the virus developing uncontrollably in some countries or fears of a second wave could weigh on the economic recovery, despite support from governments and central banks.
- Maintaining our exposure at the front end of the yield curve means that we expect further weakening of the already-fragile local economy and a possible second wave of the virus will make a challenging macroeconomic environment.
- The difficulty with this thinking is that arranging our portfolio to succeed under a pessimistic outcome put us in a tight spot if the worst does not happen. Consequently, we intend to reconstruct the portfolio to withstand a range of future paths.
- Part of the portfolio reconstruction process involves a rethink of the purpose of a bond portfolio. Instead of focusing on yield curve positioning, we think a bond portfolio should have four main sub-portfolios, each constructed differently to achieve specific objectives.
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2020-10-16 Looking to the future