In The Present Market Environment A Few Strategies For The Factor Investing
As currently as mid-February, equity markets had been near all-time highs, oil prices have been above USD 50 per barrel, volatility was low and credit markets have been functioning well. Since then, the international market selloff throughout all asset classes has been sharp, pushed by outlook uncertainty and the search for liquidity. With primary indices plunging to new lows among the news of the impact COVID-19 has had on world economies, investors are searching for ways to isolate risk and capitalize on investment opportunities.
What lies ahead?
While the terrible news about COVID-19 is possibly to proceed over the upcoming couple of weeks as countries brace for a surge in numbers, equity markets could proceed to get hit in the near-term earlier than the positive have an impact on of essential stimulus packages takes root. Each latest policy choice taken by governments and central banks to aid their economies has consequences for assets and securities. In such tumultuous occasions it is handy to lose conviction in the essential principles of investing, however these will definitely survive this disaster just as they have all preceding ones, said Georg Elsaesser, Senior Portfolio Manager, Invesco Quantitative Strategies. We want to maintain a balanced perspective.
One of the basic principles of investing is that securities markets are usually forward looking. This precept is embodied in the dividend discount model, which is a quantitative approach used to predict the price of an asset based on the sum of its future cash flows discounted by an suitable risk-adjusted rate. While small modifications in the expectations of future cash flows or the reduction price can result in the same effect on return, the ensuing long-term impacts are different. Negative shocks to returns driven by a raise in reduction price have a tendency to be more transitory, whereas negative shocks driven by cash flows should have a longer-term impact on companies. A factor approach can help, whether the pandemic receives a lot worse or finally proves much less extreme than expected.
How to proceed
With international markets in turmoil, factor investing offers a technique for investors to screen for opportunities by scanning securities for attributes that are looking for to extend publicity to factors, or quantifiable characteristics, that the investor believes will deliver the fine risk-adjusted returns. Due to the low correlation elements have with each other, diversifying throughout elements is one way to weather different monetary environments, as some factors are much less touchy to monetary shocks than others. For instance, we have discovered that the equity elements producing the best returns in the equity market downturn have been quality, low volatility and momentum, whereas other elements have exhibited higher sensitivity such as value, size and yield, comments Elsaesser. An assorted multi-factor portfolio affords an inherent hedge if the disaster has been to aggravate or the recuperation happens more swiftly.
Impact on local investors
Zainab Kufaishi, Head of Middle East and Africa, Invesco, comments: Current market prices are reflecting the near-term consequences of coronavirus. Whether we have witnessed the bottom of the market is yet unknown. Uncertainty is still high, so volatility is likely to continue to be high. But to the long-term investor, this impact is one of disruption, not damage. The massive majority of our investors in the Middle East has a long-term horizon with their investments, and should no longer try to foresee which factor will do well in the short-term. It is essential no longer to forget the simple framework of diversification, discipline and time in factor investing.
