April 09 2020

New Normal

Predictions abound on the aftermath of the coronavirus. More-of-the-same or Never-going-to-be-the-same? Well some of the future consumption choices will be down to any of us. You’ll decide to what degree you embrace the all-online change, or stick to your traditional ways. Also, we’ll surely re-think our relationship to health and wealth as a society. Piketty had told you already, but the current crisis is indeed laying bare the widening inequality of the past 10 years, with a strong correlation between poor and sick.

Some things you won’t be able to choose though. As trillions of stimuli are led by Governments and Central Banks to offset the now $5.5tn loss in global output, we’ll collectively have to paddle through an ocean of debt. National debt-to-GDP ratios are going to skyrocket to 150%, negative yielding sovereign debt will become a permanent feature of the years to come, only to make sure that interests payments remain inferior to growth (r<g). Let’s be very careful then, that a super-charged consumption doesn’t come with rampant inflation either.

Portfolio management will never be the same. The traditional 60% equity – 40% bond portfolio will no longer be the one-size-fits-all that it has been over the past 20 years. Besides, storing clients’ money into Western sovereign bonds will never be the safe haven it once was.

First, financial advisers will have to pay a higher respect to client risk profiles and investment objectives, carefully aligning asset allocations on these. It sounds obvious, but it hasn’t been for many, believe me. Secondly, portfolios will systematically be guided through risk management measures (Value at Risk, sharpe ratio). Thirdly, asset allocation will have to be more nimble, and abide by data-driven signals. The result should be a portfolio that is more guided by the volatility that any given investor could sustain, rather than any specific asset class.

Surely, investors will need more than ever the guidance of well-meaning advisers, but also will dearly appreciate increased clarity on the ways their portfolios are invested and how much fees they are charged. Tech-enabled platforms will tremendously help cutting through operational fees, and saving time, so that advisers spend more time listening to their clients and not finding the next fancy investment product. Welcome to the New Normal.

360 Advisory – Markets