La Française AM: In hindsight, what were the winning and losing investment strategies during lockdown?

La Française AM: In hindsight, what were the winning and losing investment strategies during lockdown?

Central bank
Europees Centrale Bank.jpg

Following closely Central Bank policies and understanding the true power of their actions is what made the difference. Facing a major global recession, central banks have unleashed almost unlimited funding, pushing nominal rates even lower and increasing inflation expectations. Central banks wanted, and still want, to push real rates even lower.

Looking back at the winning investment strategies over the past six months, they are all consistent with a very low real interest rate environment.

Winning investment strategies:

  • Precious metals, with gold and silver skyrocketing; historically, there is a strong negative correlation between gold/silver and real interest rates.
  •  Equities: when real rates drop, financial conditions improve which is generally positive for equities but there are significant discrepancies depending on the sector. The sectors that outperformed were those with a “long duration” bias such as high growth stocks and those with a tech / healthcare bias. The correlation between the P/E ratio of the technology sector and real rates is above 90%, meaning that investors are willing to pay more and more when real interest rates decrease.
  • Developed government bond markets (including peripheral bonds) and investment grade bonds, thanks to central bank actions.

 Losing investment strategies:

  • Equity markets again, with the hospitality, aeronautics, financial and energy sectors underperforming. The underperformance of financials was partly due to the very dovish monetary policies of central banks.
  •  Some emerging sovereign debt markets, i.e.  Ecuador, Argentina for example with a limited ability to raise capital on financial markets.
  • At present, the lower-rated high yield bond segment has not yet normalized, as opposed to the better-rated high yield segment.
  •  The US dollar, at least compared to G7 currencies. For years, the positive interest rate differential between the US and other developed countries has contributed to the strength of the dollar. However, with central bank stimulus, the gap has narrowed, pushing the US dollar to drop.