The rapid spread of COVID-19, the subsequent aggressive containment measures, and the collapse in oil and equity markets in recent months mean that global economic growth prospects have deteriorated.
Against this backdrop, investors have noted certain corporate governance concerns and, as a result, companies are withdrawing financial guidance, revising or cancelling dividends, and postponing share buy-backs.
Global equity markets slumped but have bounced back due to the unprecedented monetary and fiscal stimulus packages.
However, this does not mean that the world economy will recover soon. In the UK, chancellor Rishi Sunak warned in May that it was “very likely that the country’s economy will face a significant recession this year, and we’re already in the middle of that”.
Defined benefit (DB) pension funds will be affected by a recession as they will face falling investment returns and a spike in liabilities. On the bright side, most DB schemes have been reducing portfolio risk by cutting back on their equity exposure and expanding their allocations to fixed income and alternative assets.
Defined contribution (DC) schemes will certainly suffer a severe consequence from the short-term effects of market volatility – DC schemes tend to be predominantly invested in passive equity, although some larger master trusts had ventured into alternative investments before the pandemic started.
Most investment professionals are warning against short-term investment decisions in such highly volatile markets. Asset owners should most certainly take the COVID-19 cue to revisit their investment strategies and establish an up-to-date risk strategy.
Financial markets will continue to be volatile as sentiment swings between the negative economics and the positive support provided by governments and central banks. However, investors should be looking beyond the immediate downturn to anticipate the composition and potential opportunites of the post-COVID-19 global economy.
Venilia Amorim, editor, IPE.com