Diversification is the key in times of uncertainty

In its initial stages, the Covid-19 pandemic caused panic in financial markets. However, the turmoil turned out to be rather transient, especially compared to the 2007-2009 slump. What is more, it quickly became apparent that the crisis had brought about numerous changes, which proved to be very beneficial,

including an unprecedented loosening of monetary policy. Low interest rates have prompted a large number of bank clients to liquidate their fixed-term deposits. Part of this money went to the capital market, partly because due the coronavirus restrictions on mobility, many people had more time to actively manage their savings. The pandemic has also accelerated the digitalisation of the investment sector, facilitating access to the already easily-accessible market.

But the pandemic also carries a great deal of uncertainty which makes people reluctant to participate in the global bull market. What should investors do under these circumstances? The participants of the debate “Investing in capital markets in times of increased uncertainty - how do the best do it?” were trying to find an answer to that question. It turns out that although the situation is unprecedented, the recipe for success remains the same as always: portfolio diversification.

Five parts

- In times of uncertainty, my advice would be to divide your savings into five parts: 20 percent to be invested in private equity, 20 percent in real estate, 20 percent in stocks and 20 percent in bonds. The remaining 20 percent can be spent according to one's preferences. The capital market is shaped by emotions since it is us who change it as its participants - commented Anna Milewska, president of Skarbiec TFI.

In her view, investing in asset types that have performed well in the recent past was a reason for concern. Meanwhile, historically high rates of return do not guarantee the same figures in the future. - If you want to invest in an asset class that has recently yielded a high rate of return, you should at least assume an investment horizon longer than three months - explained Ms Milewska.

Marcin Żółtek, Vice-President of TFI PZU, emphasised that due to the pandemic, the banking sector has recorded an outflow of PLN 53 billion from fixed-term deposits. This money partly went to the capital market - TFI PZU in H1 2021 was among the market leaders in terms of capital inflow to funds (net sales of funds to external clients exceeded PLN 950 million), and its assets grew by 25% YoY. However, the savings of Polish citizens remained mainly in their current accounts or were invested in real estate.

President Żółtek pointed out that from a longer perspective - to be precise, since the previous crisis - the amount of money on bank deposits increased several times, while the amount of money invested in funds basically remained unchanged. This is not necessarily bad news, as it means that the inflow of fresh capital to the market was not the only driving force behind the increase in share prices. Several other fundamental factors were at play, including the improvement of company results.

However, according to the Vice-President of TFI PZU, some segments of the market show signs of an economic bubble. - Many companies present themselves to investors as green or technologically advanced. High liquidity on the markets favours the growth of share prices of these entities. But once central banks start to reduce this liquidity, many of them will face repricing. That is why it is important to identify those companies that are genuinly green and investing in digitalisation - stressed Mr Żółtek.

Not just for millionaires

The participants of the debate drew attention to the democratisation of financial markets, which facilitates the diversification of one's portfolio, even for retail, small-scale investors. Jacek Chwedoruk, Managing Director at Rotschild & Co. in Poland, spoke about unlimited access to foreign markets. - In Warsaw (on the main market - ed.) we recorded 11 debuts this year, compared to only two in Prague and none in Bratislava. This alone does not translate into a sufficiently large selection of attractive companies for investors. But young people know what to do: they open accounts that give them access to foreign stock exchanges - he explained.

Krzysztof Krawczyk, managing partner of private equity firm CVC Capital Partners in Poland, pointed to another manifestation of market democratisation. - Private equity funds are usually intended for institutional investors, as they require the investment of a large sum of money for a relatively long period of time. The most important clients are American pension funds. However, for about a year and a half we have been observing entities collecting smaller amounts from a number of retail investors and then entrusting the entire pool to PE funds. This has made the latter accessible to everyone - he explained.

He stressed, however, that the keen interest of investors in private equity funds can be a trap. - When managers of these funds have a steady inflow of capital, they may start to act in a less disciplined way, which will decrease rates of returns in the long run - he clarified.