Monday, March 9, 2020

You still want to own passive ETFs rather than actively managed investment funds? Maybe the COVID-19 outbreak will make you think again!

 Here’s why you want active investment managers! The United Nations reported today that some industries and regions of the world will be hit much harder by COVID-19 than others

This morning the United Nations Conference on Trade and Development (UNCTAD) issued a special report on Global Investment Trends on the potential impact of the Coronavirus outbreak on Foreign Direct Investment (FDI) in 2020 – and it wasn’t good

Depending on the scenario for the spread of the epidemic, the downward pressure on FDI caused by Covid-19 is expected to be -5% to -15% (compared to previous forecasts projecting marginal growth in the underlying FDI trend for 2020-2021).

The impact on FDI will be concentrated in those countries that are most severely hit by the epidemic, although negative demand shocks and the economic impact of supply chain disruptions will affect investment prospects in other countries.

Investing in a passive global ETF will subject you to major risks that active managers will avoid. This is a time for active management - naive investing is dangerous during periods of economic crisis.

Many multinational enterprises (MNEs) in UNCTAD’s Top 100, a bellwether of overall investment trends, are slowing down capital expenditures in affected areas. In addition, lower profits – to date, 41 have issued profit alerts – will translate into lower reinvested earnings (a major component of FDI).

On average, the top 5000 MNEs, which account for a significant share of global FDI, have seen downward revisions of 2020 earnings estimates of 9% due to Covid-19. Hardest hit are the automotive industry (-44%), airlines (-42%) and energy and basic materials industries (-13%). Profits of MNEs based in emerging economies are more at risk than those of developed country MNEs: developing country MNE profit guidance has been revised downwards by 16%.