KUALA LUMPUR (Nov 23): The worst of the pandemic-driven economic shock is likely over as global markets are recovering, supported by unprecedented global stimulus. Against this backdrop, investors should look beyond traditional safe haven assets to search for income, said Zach Bevevino, director and product strategist for BlackRock’s Multi-Asset Strategies Group.

In fact, safe haven assets like government bonds or cash are no longer risk free due to the lower interest rate environment, said Bevevino in his presentation titled “Finding consistent high-income in a low rate world”. He was speaking at the third instalment of The Edge-Citigold Wealth Webinar Series 2020 on Nov 21. 

Markets recovery is likely to persist as record amounts of monetary and fiscal stimulus have been unleashed by central banks and governments. 

“The Federal Reserve expanded their balance sheet by roughly US$3 trillion in a couple of months. That dwarfs anything they have done historically. In both size and speed, this has been a huge and important backdrop for markets. We don’t think it solves all issues but we do think it helps support the recovery,” said Bevevino.

Sizeable bills have also been announced by governments as part of fiscal stimulus packages. According to BlackRock’s estimations, the policy response globally has been equal, if not greater, than the estimated impact of Covid-19 on GDP growth. 

“This isn’t likely to go away. We are going to continue seeing stimulus [packages] and central banks [stay] accommodative, not just for 2020 but for 2021 and potentially beyond that,” said Bevevino.

Already, the impact is felt in markets, which in recent weeks have been lifted by positive news on vaccine developments. 

“We saw a record drop and recovery in markets [this year.] In March, we saw the fastest bear market in history. The S&P 500, in just 22 days, lost 30% of its value. In the last couple of months, it has recovered……Ultimately, we think we are likely to see positive economic growth in 2021,” said Bevevino, although rising virus cases remain a risk to recovery. 

Meanwhile, the US election results point towards a presumed outcome of a divided government, which is positive for markets. 

“It keeps the checks and balances on both sides, so some of the transformational policies that are being proposed are unlikely to get passed, be it corporate taxes or increased regulations that could upset markets,” said Bevevino. Investors are now watching the upcoming senate race in Georgia in January, which will determine the makeup of the senate.

Using monetary easing to support the economy, however, has already resulted in negative interest rates in some countries. According to Bevevino, there is over US$17 trillion of debt with negative yield globally, exceeding the record set last year.

This poses a challenge to investors who rely on more conservative asset classes to generate income. However, there are opportunities for yield if investors expand their opportunity set, Bevevino emphasised.

“We think that the US and Asia high-yield bonds offer compelling income today and should be supported by the backdrop of an ongoing recovery and continued stimulus,” said Bevevino. 

“If you look at Asia high-yield bonds, you can earn an 8% yield, while you can earn close to a 6% yield on the US high-yield bonds. Compare this to investment-grade bonds that provide less than 2% yield today or the US ten-year treasury [notes] that provide roughly 1% yield.”

Another asset class that he recommends is dividend stocks. It has underperformed this year because investors were concerned about the lockdowns impacting the companies’ ability to pay dividends. 

But the worst may be over, Bevevino said. “We think these companies are in reasonable shape and if the recovery persists, supported by stimulus and interest rates, dividend stocks and equity income are going to be a necessary alternative for investors.”

Other asset classes that Bevevino likes are global real estate investment trusts (REITs), preferred stocks, and covered call writing. In terms of geography, Bevevino likes Asia and the US, as the former has rebounded quicker from the pandemic and the latter has shown resilience. 

Of course, investors still need to be selective, as Covid-19 has impacted sectors differently, investors must ensure they understand the risk of different asset classes and diversify their portfolios, he added.

Earlier, in her welcoming remarks, Anna Taing, managing editor of The Edge Malaysia, highlighted how investors have found it challenging to invest this year.

“The signs of nascent economic recovery that have emerged since the third quarter of this year may not have legs given the new waves of Covid outbreaks that are streaking across Europe and the US. The possibility of a double dip recession seems to be gaining traction. But on a more optimistic note, hope is pinned on the unprecedented fiscal stimulus and monetary easing across the globe,” she said.

Themed “Thriving Amid Volatility”, the session is part three of four in the webinar series that will be held in coming months.