The success of vaccination programmes around the world and the positive waves being seen across different industries should not be the catalyst for unnecessary investment optimism.
Sacha Chorley, portfolio manager at Quilter Investors, believes that now is the time to look at diversifying portfolios to avoid any disappointments down the line.
With markets driven higher and improved economic expectations, it’s easy to see how people would feel confident in taking greater investment risks, but now may not be the time to be so adventurous.
Chorley said that investors should look at topping up their holdings in defensive assets, as it is likely that volatility will see and uptick in the near future.
Given how markets have reacted to the rise in bond yields and perceived inflation threats, not being defensive enough could spark panic among investors as the recovery effects plays out.
‘Herd mentality’
“There have been some great opportunities for investors this year as markets rode the optimism created by the rollout of covid vaccines,” he said. “But there is a herd mentality forming in markets now and concerns that investors will keep chasing returns as economies reopen and normality returns.
“As such, this is exactly the time to assess your positioning and add some ballast to portfolios by topping up defensive positions.
“Given the market reaction we have seen following the rise in bond yields and the fear inflation might spike as the global economy normalises, any sort of setback in the recovery and re-opening could spark a flight to safety.
“There are no major events this year for investors to focus on so any sign of risk to the recovery could result in a bout of volatility towards the tail end of the summer.
“In certain pockets we are also seeing signs of excessive risk taking with the collapse of Archegos, as well as the rise of leveraged retail traders in the US. Debt default rates are low given the support we have seen, but when companies have defaulted, recovery rates have often been poor so risks are present in the market. With the consensus view bullish, any upset could quickly tip into correction.
“It has never been truer to be fearful when others are greedy.”
Smaller returns than 2020
Chorley has been adding defensive qualities within portfolios, especially in healthcare holdings and “adding marginally to government bonds”, while reducing exposure to investment grade credit.
“Healthcare, in particular, has recently shown to be incredibly resilient in times of crisis,” he added.
“Valuations also do not appear to be stretched to the level of the broader market and, as such, it is prudent to be adding to this holding in the face of rising exuberance.
“Given this year will almost certainly return less compared to 2020, investors need to make sure they aren’t taking on undue risk and consider those less favoured areas of the market which might not shoot the lights out but will give you the protection needed in a downturn.
“Diversification ultimately remains the best long-term strategy.”
