Investing beyond Covid-19 I What investment strategies should investors adopt in 2021? (Part 1)

The Covid-19 pandemic dominated headlines for much of 2020, with all the drama of a typical soap opera. And markets responded alongside the ebb and flow of investors’ sentiment. What can we learn from 2020? And how should we invest in 2021?

In our “Beyond Covid-19” series, we speak with experts in different fields to learn how we can learn from the hard lessons of 2020. The first of our investing experts is Simon Teo, Senior strategist at Phillip Futures.

1. What were some investing strategies that worked in 2020?

The old phrase “Don’t fight the Fed” found itself especially relevant again in 2020. In a nutshell, that just means to invest aggressively when the Federal Reserve lowers interest rates, and be more conservative when you think they’re going to raise their rates.

This has become more true than a lot of people would like to admit. Market watchers who follow this very closely will notice that the stock market rallies after any collapse have become faster and faster over the last few decades.

It’s not perfectly comparable but it took the S&P500 6 years to recover to pre-GFC (Great Financial Crisis) levels, but it only took 6 months after the Covid-19 crash in February 2020. Central banks are becoming more and more willing to pull the trigger on interest rates and asset purchases over the years, and I think investors are starting to come to expect that kind of commitment from them as well.

2. What were some investing strategies that did not work in 2020?

I think 2020 was a good reminder not to time the market, and not to adopt a short-term view for investing.

Many investors may have been caught out in the initial days of the stock market rout in February. The declines that we saw in the beginning of February for some markets were very substantial – around -33% for US equities at one point, and were enough to spook many investors into letting go of their investments.

But as I said earlier – Don’t Fight the Fed – these days, when metrics like unemployment start rising, you can count on regulators to at least consider some form of stimulus and central bank action to support the economy in some way. Anyone who tried to time the market at this point would have missed the rally that came right after the dip.

Another strategy that probably did not work would be for investors to see the bloodbath that happened in February and choose not to invest at all, but hold cash. While it’s very important to hold enough cash because you don’t want to have to sell to raise cash when prices are down, developing a plan to invest conservatively would be better than keeping most of your assets purely in cash because you will be exposed to the risk of inflation.

3. How would you recommend someone to invest and trade in 2021, in light of what happened in 2020?

I have three “don’ts” to recommend:

1. Don’t get overly pulled into the FOMO (Fear of Missing Out) asset classes that have delivered super-sized returns. For instance – cryptocurrencies have seen large gains. It may be good to add cryptocurrencies to your portfolio to try to increase your gains, but it shouldn’t be overweight. Adopt a disciplined approach, and have some limits e.g. maximum 5% of your portfolio value.
2. Don’t be overweight in any one territory – the USA may have given very good returns in 2020, but that would be ignoring the growth stories from elsewhere around the world. Stock markets in countries nearer to home like Taiwan, Korea, and China are doing very well
3. Don’t get blindly sucked into the wave of rotation from pandemic winners into pre-pandemic assets. The pandemic will have created whole new economic landscape because some aspects of human society will be fundamentally shifted for at least the next few years. I think people are taking it for granted that once vaccines are rolled out, you can expect the pandemic-hit industries and assets like airlines and crude oil to just take off again –  I think that the risk of pullbacks are still very high, and it’s definitely not a given that a so-called rotation into those areas will necessarily help investors achieve their investing goals

Other than that, I think investors should aim to acquire some protection from inflation in 2021 by investing in non-inflationary assets like gold. When inflation happens, it’s usually faster than regulators and investors expect. Central banks around the world have never been as liberal with printing money as they have in the last few years, so aiming to have some parts of your portfolio protected against inflation would be prudent.

Investors should also sit down and take the time to seriously understand how the pandemic has fundamentally shifted important industries and affected peoples’ lifestyles and spending patterns. For example, the automobile industry – I think car sales overall won’t do as well as without the pandemic, but what Covid-19 triggered was a big push towards electric vehicles – which is why you see electric vehicle equities outperforming the market every other day. Some of the newer trends that have taken off during the pandemic are ESG (Environmental, Social, and Corporate Governance) investing, and Genomics.

Finally, looking more locally, I think S-REITs will do a lot better this year, so it might be worth picking some up for your portfolio. Singaporean investors traditionally like S-REITs but some of them were quite severely impacted by the pandemic last year. Singapore has managed the pandemic very well however, and with the vaccine now being administered on our shores and around the world, I think we will see a brighter outlook for other kinds of S-REITs like in hospitality and retail.

4. How does Phillip Futures help investors trade effectively?

We provide personalised coaching on day-trading to clients. This includes coaching on how to execute trades, and also some basic trading strategies to get you started. In a pinch, we are also ready to act as someone to consult for a second opinion on the condition of the market which I think is quite helpful given how there are many new and relatively unknown industries and assets are skyrocketing in popularity these days.

Economic recovery in 2021 will definitely not be even, and Phillip Futures offers products such as Contract-for-Differences (CFDs) that lets investors gain exposure to both upwards and downward trends, which is a potentially useful addition to any trading strategy. There are other strategies investors can employ with the products we offer – for example when thinking about short-term investing strategies, equity investors may find value in hedging their position with our equity CFDs when the market is moving against them, because they want to maintain their dividend yields or because they think it is still a good long-term hold. Trading CFDs of the main market index is also another way investors can hedge their portfolio against near-term market movements, and can be a regular part of any healthy investing portfolio.