Investing under uncertainty

How can we frame such an uncertain future?

The Covid-19 pandemic has made the outlook radically uncertain. No one can tell you when this will end. No one can tell you when the world will go back to work. Investing in this world is difficult. At Oreana, we have a strong background in stress testing and scenario analysis. We use that expertise to cope with radical uncertainty and to add value for our clients.

What are the range of plausible outcomes?

We are the first to admit that we do not know the distribution of potential outcomes in this new Covid-19 world. But we can identify some plausible economic outcomes and estimate the impact on asset prices. Table 1 below describes three scenarios – labelled Depression, Recession and V-Shape Recovery – that we think are plausible.

Table 1: Portfolio Advisory Scenarios

Which scenario is most likely?

We simply do not know which of these outcomes is more likely. Assuming anything but equal likelihood would be a guess. The critical outcome of our analysis is it follows our investment process and our governance framework – and prevents us making knee-jerk reactions.

What are the market implications?

Our scenarios analysis gives us a richer insight into plausible outcomes. We can consider the potential impact across a range of markets and asset classes. That helps us maintain our resilient portfolios through these uncertain times. Resilience means being able to participate in the upside in a V-Shape Recovery but protect on the downside in a Depression.

What can you do?

Decision making under uncertainty is hard. The risk of destroying value for investors is high. We believe actions taken through this difficult period should be put under the spotlight by clients and regulators. Advisers that have a clear investment process and a strong governance framework will be best placed to show they are acting in clients’ best interests.

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