Portfolio allocation in a pandemic

Although fiscal and monetary support has helped a bit, we doubt that “risky” assets will sustainably outperform “safe” ones again until the global spread of the coronavirus slows, which would raise the prospect of lockdowns ending and economic activity recovering. It is impossible to say exactly when that will happen – our forecasts are based on an assumption that it will be around the middle of this year, although clearly it could be longer. Even when the outbreak is under control, things will not just revert to how they were before. Ongoing central bank support and low inflation should generally prevent a major sell-off in safe assets. And given the scale of the economic hit, most risky assets are unlikely to recover all their losses for a long time. However, those losses have been so large that even a partial recovery would be enough for risky assets to outperform comfortably safe ones. We think that equities in parts of the emerging world will be the best performers in those circumstances.