Bank of America breaks down how to build the perfect post-coronavirus portfolio - one designed to recover losses and get ahead of an eventual economic recovery

• Bank of America strategist Jared Woodard is rolling out investing strategies for both the present and the future. His recommendations vary based on the timeframe.
• Woodard says that bifurcated approach will help investor portfolios recover more quickly from the market downturn and economic slump - and keep them ahead over the longer term.
• One piece of his overall strategy includes a long-term recommendation to veer away from government bonds, as they offer lower returns than high-yield credit today and look less appealing than stocks in the future.
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One of the most difficult parts of investing in the wake of a world-altering crisis is figuring out the turn. What's the best immediate strategy for a changed world, and what's the best approach in the years ahead?

Bank of America investment strategist Jared Woodard is tackling that question with a two-part recommendation. The final result is a malleable portfolio structure that Woodard thinks can serve investors well both right now, and in the future.

For today

Put simply, Woodard is favoring credit over stocks right now. He notes that other credit-related securities like high-yield bonds have suffered smaller losses in the coronavirus turmoil than stocks have, which means they'll bounce back much sooner. That's a normal pattern.

"Credit recovers faster: in the last three crashes high-yield bonds reclaimed their losses within 10 months on average, while equities needed 56 months," he wrote in a note to clients. "Companies may pay stockholders but they must pay bondholders."

Adding to that recovery is the Federal Reserve's decisions to back up all kinds of corporate debt to prevent a wave of bankruptcies. Its actions in recent weeks amount to a preference for "limited equity upside & limited credit downside," Woodard said.

Investing in corporate credit in particular might be scary with much of the economy shut down for the foreseeable future and some companies likely to go under. But Woodward notes that because credit spreads are so wide, many types of bonds are cheap by historic standards, and that's not true for stocks.

He adds that the threat of widespread credit downgrades and company bankruptcies today is limited compared to the Global Financial Crisis. Bank of America says about $200 billion in investment grade credit will be downgraded to junk status in the current slowdown, compared to around $1 trillion during the Global Financial Crisis.

It's a concern that's been circulated by many experts - from Scott Mather of Pimco to Lori Heinel of State Street Global Advisors - who see the record number of BBB-rated companies teetering on the brink of junk as a huge systemic risk.

Pulling all of that together, Woodard is telling investors to target quality, growth, and yield in their credit investments, and suggesting they build their portfolios this way.

"In bonds we recommend rolling gains from government bonds into investment grade, munis, and mortgage-backed securities; in equities we would own a defensive barbell of growth (tech & health care) and yield (utilities & staples)," he wrote.

For the future

Stretching out further, Woodward recommends betting on long-term inflation as a result of both Fed policy and an anti-globalization trend. That means equities and gold are the best bets and that investing in Treasury bonds is going to be a loser.

"Inflation will average at least 1.5-2.0% in coming years, in line with recent trends: policymakers are committed to fighting deflation and they have the tools to do so (trade, R&D, job guarantees, seigniorage)," he said. "Globalization was deflationary and localization is inflationary."

Since the Fed is committed to fighting deflation at all costs, that means an eventual pickup in economic and earnings growth will follow one of two paths, he said. In one, inflation returns as productivity rises. That means a growth trade makes sense, and there's little reason to bet on bonds, which will offer much weaker returns than stocks.

In the other course of events, where productivity is merely stagnant and inflation is steady, Treasury bond yields would still offer negative real yields, since their payouts would be well below that rate of inflation.

"Why commit to losing 1.2% (2% inflation - 0.8% yield) when you can own gold?" he writes.

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