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Investors must prepare portfolios for Covid-19 debt crunch

The financial stress caused by Covid-19 is far from over. Investors should brace for non-payments to spread far beyond the most vulnerable corporate and sovereign borrowers, in a reckoning that threatens to drag prices lower.

There is still time to get ahead of this trend. Rather than buying assets at valuations stunningly decoupled from underlying corporate and economic fundamentals, investors should think a lot more about the recovery value of their assets and adjust their portfolios accordingly.

So far, despite signs of rising stress on corporate and public balance sheets, non-payments have been largely contained to certain badly affected segments.

But the sense that the worst did not come to pass has fed complacency among investors of all stripes. A new generation of retail investors has emerged, helping stocks on their relentless march higher.

Contrast investors’ optimism with companies’ circumspection. While many central governments are focused on reopening economies that were locked down to contain the virus’s spread, most businesses have remained cautious. Many are still looking to further reduce their spending.

The wariness has been encouraged by the resurgence of infections around the world. In the US, a majority of states have now opted to halt or reverse their lockdown easing plans. And there is every reason for businesses and investors to tread carefully. Health experts warn us about over-optimism on a vaccine and, judging from the most affected areas, too many people are yet to properly take on board the infection threat and align their behaviours with the risks facing society.

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