BNP AM

The official blog of BNP Paribas Asset Management

Investing post COVID-19 – An actuarial perspective

Asset management clients are asking whether our views of the investment world have changed as a function of the COVID-19 pandemic. The answer is most definitely ‘yes’!

In fact, the COVID-19 crisis has underlined a key component in an economy’s sustainability: its emergency readiness.

Coming off the back of a decade-long bull market, where benchmark-driven/developed market investment strategies outperformed all others[1], has not helped matters.

Allocating: it is about more than growth

When allocating investments across markets to build long-term sustainable portfolios, one key variable that is considered is growth in GDP, by itself and relative to other economies. This is by no means the only variable.  However, it is important. It is a strategic base for comparing economies and quantifying their relative potential. In turn, this is the foundation of our long-term allocation to markets.

Ultimately, flow matters. And it is imperative that governments ensure that growth in their respective markets is disrupted as little as possible.

At a company level, we look at the capital and credit structure and overall assets versus liabilities. Most importantly, we assess how these financial components change under stress. For example, an insurance company’s actuaries[2] would model and attempt to quantify its ability to pay policyholder claims, while remaining liquid in the case of worse catastrophes.

We call this measure economic capital. It is a safeguard for the worst-case scenario a company could face.

Where is the economic capital requirement for your country and what does that mean?

Economic capital is simply the amount of capital required to survive a worst-case scenario. This begs these questions:

  • Where does your country’s rainy day fund – or in this case, pandemic money – sit?
  • How was it computed?
  • How was/is it used during the COVID-19 outbreak?
  • Where was the country-level chief risk officer to inform government leadership?
  • Does such a post exist or is the economic capital being managed ad-hoc as it was for many firms before financial chaos caused reforms?

How does this translate to investment allocations?

Governments can no longer afford to tackle crises such as the COVID-19 outbreak in a tactical manner. The 2008 Great Financial Crisis created a push towards managing downside risk that changed the way we assess investment strategies. The COVID-19 pandemic should and will have a similar impact. It will force a shift in how investment managers assess country readiness and the impact of similar crises.

We believe a country’s ability to be ‘advanced’ should go hand-in-hand with its ability to apply a ‘hedge’ on the economy so that its industry can continue to run given that it too is properly capitalised to deal with its own tail risk.  

Economies with rapid growth such as China operate at higher speeds and are able to manage economic turbulence more tactically, but the same cannot be said for the advanced economies.

Readjusting the risk calculation

The bottom line is that the risk adjustment when calculating the return potential for an asset class within a market has changed due to the COVID-19 crisis. Many advanced or developed markets were hit harder than emerging markets (specifically in Asia where it all started). This shows the readiness or tools were not available to contain the spread.

Several governments have supported their markets by handing out massive stimulus cheques – or hinting they would do so. However, it is not clear how much actual capital is required and how much debt will be incurred as a result.


[1] Past performance is no guarantee for future returns.

[2] Actuaries assess risk in insurance, finance and other industries and professions. More generally, they apply rigorous mathematics to model matters of uncertainty. Source: https://en.wikipedia.org/wiki/Actuarial_science


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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