Adapting wealth protection post-pandemic

The economic disruption caused by COVID-19 has been unprecedented in the last 70 years. All over the world, businesses have been forced to close, employees told to stay at home and entire sectors have ground suddenly to a halt. As many industries begin to take their first steps towards recovery, many are still in a state of near paralysis. The International Air Transport Association¹ does not expect the aviation industry to return to pre-pandemic levels until 2024, while in the UK hospitality sector, sales are 56% lower² than they were in the summer of 2019.

Politicians, economists, fund managers and investors are all beginning to sound the alarm about the potential long-term impacts of the pandemic on the global economy. Research from the Federal Bank of San Francisco³ shows that pandemics are typically followed by sustained periods, perhaps spanning decades, of depressed investment opportunities. With the IMF already predicting a drop in global growth of 4.9% in 2020⁴, it is clear we could be entering uncharted territory for long-term wealth protection.

Adding to the complexity is the fact that the virus’ effects have not been uniform across the world. Countries and communities have been impacted differently, while certain asset types have seen varying performances. These assets will continue to perform differently as we emerge from the crisis and move further towards recovery. There is also increasing evidence that some generations are being affected more negatively than others. 

A generational split  

For some millennials⁵, the economic fallout of COVID-19 will be the third recession of their working lives. Now the pandemic seems to be exposing generational differences in the resilience of various groups to economic shocks. These differences could signpost the new direction long-term wealth planning may take in the coming years. 

The early stages of the crisis were marked by large daily movements in equity markets, with some stocks falling by 30% in some G20 nations in March. As the global economy began to shut down, older and more experienced investors remained relatively calm. This can perhaps be put down to having lived through events like Black Monday, the dotcom bubble and the 2008 global financial crisis. They showed more confidence during the initial downturn and participated more in the market upside which followed. 

Early indications show that younger generations have taken a much heavier financial hit. Already more prone to prioritising short-term thinking over longer-term strategic objectives, millennial investors have been more adversely impacted than older generations. Research from UBS shows that 80% of high-net worth millennial investors are worried they do not have enough savings to go through another economic shock of this magnitude, and half are concerned about their job security. This is compared to only 10% of baby boomers having the same concern. The anxieties created by this pandemic could have long-lasting effects on the way younger people approach wealth protection.

The need for flexibility and security 

COVID-19 is already beginning to have profound, transformative effects on the wealth management industry. Some changes already observed⁶  are shifts among clients towards being more cautious, digitally minded and concerned with sustainable investments. Individuals are showing a greater preference for preserving wealth and re-balancing their portfolios in order to diversify and guard against volatility over the long term. This can be seen by the rise in investments in environmental, social and governance investing, as investors look for sustainable growth. 

The shift to remote working caused by the pandemic could also play a role in the ongoing emphasis on prioritising flexibility and digital access to their accounts. Investors want to be able to manage their finances, and access services and advice, from anywhere in the world. While it remains to be seen exactly what effects COVID-19 has on the way we work, there is likely to be an appetite for more flexible working arrangements among younger generations and an increasing expectation to be able to manage all their financial affairs remotely. 

Flexibility is emerging as a key priority for investors as one of the main ways of meeting the challenges ahead. Portfolios need to be actively rebalanced to quickly implement strategies that capitalise on areas of opportunity, such as digital payment technologies, emerging economies, infrastructure and food security, while avoiding sectors that remain vulnerable such as travel and hospitality. These areas of opportunity and increased risk will change over the long-term, so wealth protection arrangements need to have maximum flexibility to allow quick shifts in focus. 

We have all had to adapt to a dramatic and unprecedented global shock this year. In order to grow and protect wealth effectively, the strategies and approaches we use will need to adapt too. In a world of slower growth, the aim is to have the flexibility to find the right investment opportunities and make the most of them. This approach will help ensure the financial freedom and security of individuals and their families for years to come.

Sources:

[1]  https://abcnews.go.com/Business/wireStory/air-travel-expected-recover-2024-72030237
[2] https://www.bbc.co.uk/news/business-53297651
[3] https://www.frbsf.org/economic-research/files/wp2020-09.pdf
[4] https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
[5] https://www.ubs.com/global/en/wealth-management/chief-investment-office/market-insights/house-view/daily/2020/millennials.html; https://www.pwmnet.com/Wealth-Management/Coronavirus-volatility-lays-bare-generational-split-towards-investing
[6] https://www.bloomberg.com/news/articles/2020-05-08/ubs-s-lo-says-pandemic-transforming-wealth-management-industry