COVID-19 Pandemic Portfolio Rebalancing - Investing into the energy sector

The recent market turmoil has presented us with a new opportunity as oil prices plunged by -66% and energy equities by -51% in Q1 2020. Valuations of energy equities fell below their historical lows; with a price-to-book of 0.82 compared to their 10-year average of 1.62. Oil demand has declined as countries go into lockdown and oil prices at current levels are already pricing in a lot of the bad news. Consequently, we will rotate out of our cash position (UOB United SGD) and into Energy (Blackrock World Energy Fund). Even as the market outlook is uncertain at this point in time, energy equities are offering an attractive valuations and potentially can outperform our cash position over time. We are also looking to reallocate a portion of the Emerging Market equities towards the energy fund as the COVID-19 spreads to countries such as Russia, Brazil and India. Countries such as India have an undeveloped healthcare system which will not be able to cope with a large scale outbreak and the only solution is to extend the period of social distancing, which will add to the economic pain, as the lock down continues. Hence it seems prudent to reduce the weightage of those sector, where the pain of the pandemic remains at the early stage.

On the CPFOA portfolio, we will be using an Asia fund (Schroder Asian Growth) for the CPFOA funds as there are no Energy fund on CPFOA portfolios. Schroder Asian Growth has a large proportion of the fund invested into China equity, which is best positioned at this moment in time to recover from the COVID-19 pandemic.

In terms of asset allocation, we will be moving towards a 65% allocation into equities while maintaining the rest of the allocation in bonds and cash. The market has recovered half of it losses since the low of 22 March on optimism that the COVID-19 pandemic is getting controlled in major developed countries. However, whether we will go straight up from here, remains to be seen. We also do not want to be too conservative in our approach and miss a rally back to the top, and hence we should take advantage of this midpoint to buy up some extremely undervalued energy funds and position for the recovery in the longer run.