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Portfolio recovery – balancing risk and return

14 July 2020

Most investors are opting for security and savings over high returns at present, says Giles Coghlan, chief currency analyst at HYCM

Like me, you’re probably wondering whether now is an ideal time to begin implementing a post-pandemic recovery plan. By this, I mean a financial strategy that is able to recoup any potential losses incurred as part of COVID-19 and build a portfolio comprising of assets best-positioned to deliver security, returns and growth.

As with most things concerning the financial markets, this is much easier said than done. One question which is consistently asked is what asset classes are best able to strike that effective balance between risk and return. Of course, there is no simple answer to this, and responses will vary depending on who you ask.

There are some who call for an aggressive investment strategy. Rather than taking a long-term outlook, they advocate for constant trades and investment movements to ensure loses are minimised and sudden openings can be taken advantage of. This is a high-risk strategy and something only the most experienced investors should consider. For the most part, it looks as though investors in the UK are opting for security over high returns at present.

Over 900 UK investors were recently surveyed on behalf of HYCM to uncover just how COVID-19 has affected their financial strategies and the actions they were taking to manage their portfolios. According to this research, 30% of all investors say COVID-19 has radically changed their finance and investment strategies for the current financial year. Interestingly, a third of the investors surveyed said they will be putting more money into their savings account in the coming 12 months.

The fact that such a large number of investors are retreating to cash savings is telling. Even with interest rates at a historic low of 0.10%, investors seem to be pooling their capital into bank accounts as part of a short-term hedging strategy. I say short-term precisely because the rate of inflation and potential for negative interest rates mean that cash will ultimately lose value the longer it stays in a bank account.

Such investors are likely to return to the financial markets once there is greater certainty. Even with the majority of countries transitioning out of the COVID-19 lockdown, there are still concerns over a potential second outbreak of cases which could result in social distancing measures being reintroduced. For example, with the number of coronavirus cases exceeding 10 million on the 29 June, markets in Asia fell into the red while European markets stayed flat as a result of trader uncertainty.

The future is uncertain

At the moment, the stock market is in a relatively healthy position. The major indices have been able to quickly recover from the economic disruption caused by COVID-19. Their ability to bounce back so quickly has led some to question whether such a recovery is sustainable. There are even concerns we could be on the brink of a second financial crash in 2020 once the economic implications of the coronavirus pandemic are fully realised. Of course, based on what has transpired over the last six months, all potential scenarios must be left on the table.

For investors and traders, however, there are some interesting developments to take note of. One of these has to do with the price of gold. Since the beginning of the pandemic, the precious metal has been used by investors as a safe haven asset and inflation hedge. Private banks have also been encouraging clients to look to gold, resulting in growing demand and record-breaking prices.

Gold is currently trading at around $1750 per ounce, and Goldman Sachs expects gold to set a new record high of $2000 in the medium-term. What makes this exceptional is the fact that even as countries like the UK transition out of lockdown, investors are still looking to gold as a safe haven. They are clearly not confident that we are completely out of the woods.

Now is without doubt one of the most difficult trading periods in recent memory. There is simply so much uncertainty in the air that investors have become conservative and risk averse. In response, we could see central banks setting negative interest rates in a bid to spur on a new wave of investment activity. At the moment, it is still too early to tell whether such an outcome is likely. Nonetheless, investors need to tread carefully over the coming months.

There is good reason to be optimistic, but this needs to be countered by a realistic understanding of all the potential outcomes that could occur, be it a second outbreak of cases or a substantial economic downturn.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

Giles Coghlan is Chief Currency Analyst at HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the Henyep Capital Markets Group established in 1977 with investments in property, financial services, charity, and education. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.

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