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5 investment lessons from the pandemic era



How has the pandemic affected investing? What are the main takeaways? (Photo : Capital Group)

How has the pandemic affected investing? What are the main takeaways? (Photo : Capital Group)

How has the pandemic affected investing? What are the main takeaways? Steve Watson, Equity Portfolio Manager at Capital Group, shares his expertise, personal experience and market strategy.

Steve, as an investor with more than three decades of experience, what stands out the most from what we’ve seen over the past 16 months?

The past 16 months have been highly atypical, intensely painful and incredibly instructive. In March 2020, as the COVID-19 pandemic spread across the globe, the Standard & Poor’s 500 Composite Index and MSCI All Country World Index hit bottom, establishing the fastest bear market in history. And yet by July 2021, stock markets had already swung back to record highs.

At the end of 2019, inflation and interest rates were low. Banks were eager to lend, and companies seemed willing to invest in productive capacity – as opposed to share buybacks and acquisitions. I felt confident that the markets were well positioned for a period of strong returns. I entered 2020 mainly focused on cyclical stocks (in sectors like automotive, tech and manufacturing, where stock performance follows the economic cycle). This approach has served me well for many years, as it generally pays off, but as the global economy came to a virtual standstill, it started to look a little problematic.

Market disturbances are a fact of life for investors (Capital Group)

Market disturbances are a fact of life for investors (Capital Group)

If you wish to learn more on this topic, read here the detailed analysis and figures from Capital Group Equity Portfolio Manager Steve Watson.

Do you think market crises are inevitable?

Market disruptions seem to take place every 18 months or so, and they’re a fact of life for investors. In my career, I’ve witnessed 21 market traumas, including the collapse of the Soviet Union, the bursting of the dot-com bubble, the 2008-2009 global financial crisis and now the COVID-19 pandemic-driven stock market crisis.

No one could have predicted the pandemic, but it was highly likely and foreseeable that something would come along and disrupt the incredible bull market of the previous decade.

What lessons can we take away from these events?

History can serve as a guide, but interpreting it isn’t an exact science, and history does not necessarily repeat itself in ways you might expect. Like others, during the early months of the COVID crisis I drew some false parallels with the SARS (Severe Acute Respiratory Syndrome) epidemic in 2003, which turned out to be much more limited. Drawing conclusions about COVID from the SARS experience was a mistake, leaving investors unprepared for the extent and duration of this pandemic.

I do think that the swift governmental response – both fiscal and monetary – to the COVID crisis helped minimize some of the damage to my pro-cyclical positions.

I do think that the swift governmental response – both fiscal and monetary – to the COVID crisis helped minimize some of the damage to my pro-cyclical positions.
Steve Watson

Steve WatsonEquity Portfolio ManagerCapital Group

So which investment strategies make the most sense now?

 It’s important to have exposure to both “growth” stocks (stocks that offer clear visibility of future results and are expected to see strong, steady growth over time) and “value” stocks (listed stocks purchased at a price below their true value), as long as you buy them at the right entry point (purchase price).

In 2020, I had invested in some technology shares, particularly in the semiconductor industry, as well as some consumer-oriented internet and e-commerce companies. I think that my limited selection of growth-oriented stocks helped me pull through during the worst days of the crisis.

I remain a strong believer in the resilience of the tech sector. Entry point is important to me, which is why many of my tech-related investments are long-term holdings. I like to purchase shares when they are down and out, and to hang on to them to let the market catch up with the true value of the company in question. As these stocks rallied amid the pandemic, I gradually trimmed some of them to make room for more unloved areas of the market, including energy, financials and travel.

I remain a strong believer in the resilience of the tech sector. Entry point is important to me, which is why many of my tech-related investments are long-term holdings
Steve Watson

Steve WatsonEquity Portfolio ManagerCapital Group

What role are dividends likely to play, after taking a back seat during the pandemic?

I have long thought of dividends as the main way of transferring value from a company to its investors, and I’m convinced that this will continue to be a stabilizing factor during periods of market turbulence – a role which seemed completely absent at times in 2020. But as a wealth-transfer mechanism, dividends are more important than ever.

Do you expect the economy to pick up?

Just as the markets have come full circle, I find myself feeling much like I did in late 2019. I expect global markets to grow. My portfolios are still pro-cyclical, meaning I tend to focus on companies that will be winners when global economic growth picks up again.

Copper prices, for instance, help predict the path of global economic trends, and are telling us now that the economy is mounting a strong recovery, which is likely to continue. I’m also finding investment opportunities in emerging markets that are highly attractive from a valuation perspective, despite higher volatility.

I’m hoping to see a return to historical norms, and it looks like conditions are ripe for growth to hand the baton back to value.

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