The falling interest rates made many investors move from debt to equity. While doing so, they chose investment instruments which were paying good dividends. Dividends became a proxy for interest. This trade worked well for little under a year.
Subsequently, it has gone horribly wrong. Here is the bad news – it could get worse. The reasons are structural. Investment managers will turn helpless in managing balanced funds. Asset allocation funds were the second proxy. This too seemed to work well for a little longer. But, there comes a time when products simply fail for structural reasons.
The coming year will see risks spike in structured products of all kinds. Investors who thought they were simplifying their investing will realize how complicated it has become. The coming year is probably going to need unprecedented counterintuition. Blindly playing contrarian may not work out. Investing must primarily be driven by the need to make investments bullet-proof and secure. Returns will become secondary. Capital protection needs will rise if the virus prolongs for a few more weeks.
Governments, businesses and individuals will downsize in the post-COVID world. Investing will turn ultra-defensive and flows will also be very selective. Returns will be made only in select parts of the market. The current rally in pharma stocks is a sign of things to come. Choose to be well informed, well advised, or preferably both. The world is now entering its toughest investment phase in history.