In a matter of months, COVID-19 has wreaked havoc across the state of the world’s political, social, and economic climate.
Oil prices are plummeting, local currencies are devalued, and travel bans, community quarantines, and other government restrictions have had a severe impact on trade, tourism, and capital flows.
In fact, some analysts believe that this may be the deepest global recession in history, inflicting damage surpassing even that which was brought about by previous such crises.
IThe 11-year bull market has taken a free-fall in this short few months. The stock market index of the 30 largest companies in the US—otherwise known as the Dow Jones Industrial Average—dropped by 20% in just 20 trading days, making it the “fastest bear-market plunge in history.”
In this original article by Validus Capital, a P2P lending platform offering business financing solutions to SMEs, hear their insights on how should investors react to these macroeconomic changes?
How Should Investors React?
In the span of just a few months, an 11-year bull market has taken a free-fall. The stock market index of the 30 largest companies in the US—otherwise known as the Dow Jones Industrial Average—dropped by 20% in just 20 trading days, making it the “fastest bear-market plunge in history.”
Emotionally, individuals feel losses twice as strongly as they do with gains. As investors and high net worth individuals (HNWIs) witness their investment values plummet, a knee-jerk reaction would be to seek liquidity by holding cash. However, taking a balanced approach towards investing and seeking instruments that net positive returns through in-built loss-mitigation features is one strategy investors have employed.
When selecting investments, it is crucial to remember that past performance is not indicative of future results. COVID-19’s effect on the economy is significantly different from past economic crises. Instead, it’s a company’s ability to withstand economic downturns that will dictate investability.
Diversification Is Key
Diversification is also becoming a prominent strategy among investors and HNWIs in light of COVID-19. A diversified portfolio can minimise the risk of loss, provide stable returns, and offer resilience during economic downturns.
While it’s impossible to predict how assets will perform under any given scenario, putting your eggs in several baskets will allow you to take a risk-adjusted approach – balancing returns with potential losses.
One alternative asset class that has been gaining traction in the past few years is SME direct lending via peer-to-peer (P2P) platforms.
P2P loans are a relatively new type of investment where investors can lend money to borrowers – usually individuals or SMEs – through a P2P lending platform.
This provides a new avenue for borrowers to obtain credit, and at a much faster rate than they might receive from a bank or a grant. P2P loans have very short loan tenures, low initial cash outlay and default rates, and comparatively high returns.
Typical financial assets that deal in short-term loans, such as money market instruments, can provide annualised returns of 2% to 3%.
Whereas P2P lending can provide 7% to 12% – and as these investments are essentially debts, investors can expect repayments as agreed on the loan terms.
But one of the most appealing parts of P2P lending (especially during this period of uncertainty), is that it has no correlation to stock and bond markets, and therefore can perform consistently even amidst the pandemic.
Nikhilesh Goel from P2P lending platform Validus Capital said: “In maintaining our portfolio performance, we continue to focus on key opportunities in Corporate Vendor Financing (CVF) and Invoice Financing products across sectors.”
“Our current portfolio has minimal concentration within sectors that are directly impacted by COVID-19, and where present, we have built-in safeguards by being linked to B2B scenarios and government entities for whom our borrowers are providing essential services to,” Nikhilesh added.
For more information on P2P lending, visit Validus.