Bolstering Asset Allocation Defenses Against COVID-19
It’s been quite a challenge for investors to manage portfolio risk in the pandemic era. Sudden twists and turns in the public-health trajectory of COVID-19 have had wide-ranging effects on the global economy, prospects for individual asset classes, industries and companies, and portfolios.
The omicron variant is the latest disruptor, following on the heels of the initial coronavirus outbreak and delta variant—each outbreak bringing uncertainty and sizable downside risks in the near term. One approach to tackling these risks is to dial exposures to risk assets up or down.
However, that’s a fairly blunt tool, because asset classes aren’t monolithic. The pandemic’s impact varies greatly within equity, fixed income, commodities and currencies, and the sensitivities cut both ways: some market segments benefit when outbreaks force mobility restrictions, while others suffer.
This performance divide is visible in US equity markets by comparing a “stay at home” stock basket and a “go out” stock basket.
Stay-at-home stocks, which have benefited during COVID-19 outbreaks, include issuers such as at-home entertainment firms and remote work enablers. Go-out issuers, which have fared well as activity recovers, include resorts and airlines. A combined long position in stay-at-home stocks and short position in go-out stocks (Display) rallied during both the initial outbreak, which started in February 2020, and the delta variant outbreak, which first surfaced in August 2021.
Past performance does not guarantee future results.Data through January 10, 2022
The “Stay at Home” basket is represented by the Goldman Sachs US Stay at Home basket of US-listed equities that may benefit from consumers spending more time and money at home. Stocks are equally weighted with an average daily value cap of 3% on $100 million. The “Go Out” basket is represented by the US Global Health Risk basket, which consists of US-listed equities predominantly in leisure-travel industries (including airlines, hotels, gaming, cruise lines, theme parks, restaurants and mall-based retail) that may be impacted by the perceived threat of a global health issue. The basket is optimized for liquidity and borrowing, with no name greater than 1.5 times an equal-weighted construct.
Source: Goldman Sachs and AllianceBernstein (AB)