As we kick off the second half of 2020, with markets trying to figure out what economic growth looks like post the initial pandemic shock, investors are busy looking for opportunities going forward.
In search of some ideas, we reached out to two ETF strategists with the following question: "What is your best investment idea for the second half of 2020?" Here’s what they had to say:
Deborah Frame, president of Toronto-based Frame Global Asset Management:
Our outlook for the U.S. economy reflects a recession that began in March 2020 and extends through to the end of the year. The economic impact of the extraordinary measures taken by governments around the world to flatten the COVID-19 pandemic curve is highly uncertain. The outcome will depend on the evolution of the virus and the intensity and efficacy of containment efforts.
Our approach looks for low and inversely correlated assets in a recession environment. Rather than the traditional diversification approach among asset classes, we focus on correlations among asset classes in shifting economic environments.
Correlations are typically higher in economic environments that lead to negative growth and associated negative asset class returns, and lower among asset classes in economic environments that are positive for growth (risk-on periods).
Gold is often correlated with the stock market during risk-on periods while it decouples and becomes inversely correlated during periods of stress. This is unique among most hedges in the marketplace.
Why gold? For two top reasons for the remainder of 2020:
- Massive policy support from the Fed. It pushed down nominal Treasury yields and led to a recovery in investors’ expectations for inflation. As a result, the real yields of those bonds fell by more than nominal yields, reducing the opportunity cost of owning gold, which is a “real” asset that pays no income.
- Ongoing asset purchases by central banks. The case for central banks holding gold remains strong and is supported by the findings in the recently published 2020 Central Bank Survey. Not only did 20% of respondents say they intend to buy gold in the next 12 months (up from just 8% in 2019), but factors related to the economic environment—such as negative interest rates—were overwhelming drivers of these planned purchases. This was supported by gold’s role as a safe haven in times of crisis, as well as its lack of default risk.
For a larger view, please click on the image above.
Looking beyond 2020 into 2021, gold is preferred over other asset classes for several reasons.
- Falling rates and negative returns have made government debt less attractive and have increased the possibility of higher inflation and currencies depreciation in the future.
- Market corrections will continue as future stock earnings expectations will continue to be revised down. Simultaneously, geopolitical risks are heating up amid tensions between the U.S. and China, escalating tensions over Hong Kong, civil unrest in the U.S. and the return of Brexit uncertainty. Gold is a store of value and a safe alternative.
- The economic and social impact of COVID-19, as well as the potential for a second wave of outbreaks, add to general asset class volatility, favoring gold.
For a larger view, please click on the image above.
[Editor’s Note: If you are looking to access gold via ETFs, there are 30 different funds to choose from, led by the likes of the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU). Check out our Gold ETFs channel for more.]
Kathryn Schwartz, founder and CEO of Pawleys Island, South Carolina-based Pawleys Investment Advisors:
The quarantines and shutdowns of 2020 have thrown global economies and markets into a sort of “suspended animation.” The confusion and lack of clarity, combined with the fact that there are so many quickly moving parts affecting the markets, has made for many long hours for portfolio managers.
But the indiscriminate selling that led to the market bottom on March 23 only created opportunities for those burning the midnight oil. So, what does all this mean for the second half of 2020, and what portfolio actions are being considered by Pawleys Investment Advisors?
- Allocations: March was riddled with indiscriminate asset liquidations. There was so much uncertainty and many quickly moving parts regarding how the quarantines and shutdowns might affect the markets, so we were reluctant to remove or add to individual names during that time. We did, however, add to the SPDR S&P 500 ETF Trust (SPY) for clients who had the means and fortitude during the spring market dip. We will eventually reallocate those funds into individual names. We have consistently gone on record that big blue chip U.S. stocks remain the single best way for most investors to build wealth, especially within the current environment of persistently low interest-rates.
- Stock Selection: We invest our private placement LP [limited partner] funds and SMA’s [single managed accounts] in companies with little or no debt, good earnings growth, solid cash flow and reasonable valuations. The current range of earnings estimates is wildly broad, so we’re using 2019 earnings to assess valuations, with some caveats outlined below. The overall financial health of companies is critical, especially during times like these.
- New Landscape: The quarantines and shutdowns will affect different sectors and companies in various ways—the strong will get stronger, some will not survive, many will fall somewhere in between. For the remainder of 2020, we will be evaluating companies within this context, and specifically evaluating them within their sector.
We remain cautiously optimistic. The yield curve is upward sloping, and in May, the leading economic indicators advanced .8% (following the COVID-induced drops in March and April), both indicating a healthy economy in this opaque time.
We are happy with how the Pawleys Dividend Fund has performed so far during 2020—after delivering 40.61% gross return in 2019 (versus 25.81% for the Dow Jones Industrial Average), through June 30, 2020, the fund is down only -1.14% (while the Dow is down -10.59%).
We believe those investors who continue to hold high-quality names for the long-term will be greatly rewarded.
[Editor’s Note: There are many ways to access dividend ETFs, and smart-beta ETFs focused on the quality factor, and there are funds that combine both things. For example, the Vanguard High Dividend Yield ETF (VYM) is the biggest high dividend yield ETF on the market; the iShares Edge MSCI U.S.A. Quality Factor ETF (QUAL) is one of the most popular quality-focused funds; and the iShares Core Dividend Growth ETF (DGRO), focused on dividend growers specifically, and the WisdomTree US Quality Dividend Growth Fund (DGRW) blend both dividends and quality.]
Contact Cinthia Murphy at [email protected]