Investment strategy: Generate attractive returns in the low interest-rate environment.

Central bank monetary policy influences investment strategy

With their monetary policy responses to the COVID-19 pandemic, central banks have shown that they will do everything they can to avoid a crisis, as long as inflation remains within the comfort zone. This means that the likelihood of an imminent crisis, triggered by deflation risks or short-term overheating of the economy, has reduced significantly. For this reason, inflation is unlikely to worry markets in the near future.

Central banks will continue to try to contain risks. As a result, risk aversion and thus the equity risk premium could fall further, which should in turn boost performance in the medium term. With central banks pushing yields to low levels, high-quality nominal investments are offering only very low real returns.

Using equities to improve the prospects of attractive returns

In the current political environment, investors are well advised to ensure that their portfolios have sufficient exposure to tangible assets. For those who wish to preserve their real wealth and meet their long-term obligations, the stabilization of the global economy may make it worthwhile to invest a large proportion of their portfolios in equities.

Alternative hedging options for the investment strategy

If investors want to enhance their equities management to improve their earnings prospects, they should diversify the equity-related risks of their portfolio by not only investing in government bonds but also by looking for alternative diversification methods. Doing so can, for example, enable hedging strategies on derivative markets to help adjust risk exposure in multi-asset portfolios. These should be managed actively, as costs and the need for hedging can change over time.

Another way to further protect themselves is to open up market positions that are likely to perform strongly in the event of an equity market slump and that otherwise tend sideways or generate low returns. This type of hedging can cushion sharp declines in market prices, but it also requires active management.

Consider sustainable investments in your investment strategy

Expanding your portfolio with more asset classes is a good way to achieve a better balance between risk and return. Real estate is not the only option available – ESG investments are also expected to generate attractive returns. ESG (environmental, social, and governance) investments allow investors to direct their portfolios toward sustainable projects that place great importance on good corporate governance.

The prospects for returns in fixed-income portfolios can be improved by building up credit exposure. Credit spreads are still slightly above pre-crisis levels, so are expected to deliver good returns. As the effects of the coronavirus crisis are likely to lead to rising default rates in lower credit quality segments in H1 2021, the focus on market segments with strong credit ratings remains warranted.