How to allocate assets into stable investment products?

COVID-19 has taken a toll on the world. To prevent widespread, several measures were taken. From social distancing measures to curfews to lockdowns, global cities faced the wrath of the pandemic. In order to save the weakening economy, many countries implemented fiscal policies to relieve the unemployed and endangered enterprises. Interest rates were lowered and quantitative easing (QE) was also brought into effect. The US Federal Reserve drastically lowered the interest rate by 1.50%, thus returning to the zero interest era and implementing unlimited QE. This measure allows the US Federal Reserve to keep buying treasury bonds until the economy improves. (QE: Monetary policy where the central bank purchases financial assets or government bonds to inject money in the economy to expand economic activity.)

An average person becomes the biggest loser in a low-interest environment

To solve the financial crisis in 2008, the Federal Reserve resorted to three QEs in March 2009 after the interest rate was reduced to zero. Amongst them, the QE3 in 2012 was also “unlimited” until the economy improved in 2014. QE finally stopped in October 2014 and the Federal Reserve increased the interest rate at the end of 2015. The entire QE period lasted for six and a half years. During the QE period, Hongkongers experienced that asset pricing and commodity pricing soared. In general, Hongkongers mostly care about property prices. The properties that were listed one million at that time, have now risen to five million. The price of properties has sky-rocketed to an extent that it is unaffordable for an average person. The rent for a 300-square-foot unit has risen from HK$ 6000-8000 to HK$ 14,000-15,000. 

Those who couldn’t afford the expensive rent, have moved further and further away from urban areas. Similarly, a meal that cost around HK$ 20 became $40-50 on average. Transportation costs have also increased on a yearly basis. However, the yearly salary increase hasn’t caught up with the inflation rate. The interest rate of bank deposits is as low as zero. An average person who doesn’t have a proper investment channel will continue to lose their wealth incrementally and become the big loser of this low-interest rate and QE.

Due to the pandemic, governments around the world have provided handouts to everyone. Now the question is, “will this trigger another wave of increased asset prices?” Many business analysts have disputed this issue. In 2008, Lehman Brothers’ filing for bankruptcy triggered the Financial Crisis. A global economic downturn was caused as a venerable Wall Street brokerage firm failed to clear its debts. As a result, the investment market was hit badly. However, the real economy was partially impacted. At that time, the government released QE in time to allow companies to tackle the problem. The economy continued to operate and the hope was that the markets can recover quickly.

The scale of impact and economic damages caused by coronavirus is far greater than what transpired in 2008. The pandemic has caused many companies to stop production, economic activities are on halt and operating factories and businesses has become difficult. Several industries such as tourism, shipping and hospitality, among others, might take years to balance the losses of previous quarters. Governments around the world are providing subsidies so that wages can be provided and businesses continue to run. Despite their efforts, many thousands of businesses have been shut down and unemployment has become a worrying sign. 

There are too many uncertainties as far as the recovery is concerned. Another question that’s on everyone’s minds is, “how long will the pandemic last?” If it lasted for one or two months, businessmen and merchants could resume their operations and revive the economy in a few months’ time. But it has already been a year and with new strains of COVID-19 emerging, it seems that the world will be in for a longer fight than initially planned. In that case, world governments will increase the degree of fiscal policies. 

The next question then becomes, “can the government afford such high expenditure?” The so-called long-term poverty is hard to deal with. If the economy continues to fail, printing of money will only end with super inflation and the society will fall into yet another Great Depression. With multiple vaccines available, we hope that the pandemic passes as soon as possible and normalcy is restored. With uncertainty still prevailing, investors wonder if the market can have a V-shaped recovery. Some investors also predicted that the market will achieve an L-shaped status which means a slow rate of recovery with unemployment and stagnancy. Some are also convinced that the economy will further drop and not stabilise for years to come — which is too pessimistic.

The pandemic will come to an end one day. Whether the economy manages a V, K or L-shaped recovery, depends on a lot of factors. Therefore, at this stage, it is better to adopt a more conservative investment strategy. Some people suggest that one should invest in the stock market and other high-risk investments to make a rebound. Others say if one does nothing, claiming “cash is king”, they can retain their wealth temporarily, but when inflation occurs, cash will become worthless. Recently, more of my clients have started inquiring about conservative investment products such as annuities or savings plans with guaranteed dividends. Although these returns are not high, they may only be around 4-6% p.a. but they have the function of achieving returns without being exposed to market risk. For those who want to know more, feel free to reach out to me.

Article by: Bryan Kong

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