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The 2020 rollercoaster and thoughts for 2021

2020: A record-breaker

Superlatives abound when describing the events of 2020.  Here are a few of the highlights:

  1. The shortest and sharpest bear market on record.
  2. One of the strongest and sharpest recoveries on record.
  3. A significant rise in the quantum of bonds globally offering (!) negative yields.
  4. Unprecedented central bank interventions in markets.  Collectively, central bankers released US$15 trillion of liquidity, or close to 30% of global GDP, to support markets.
  5. The resolution of the Brexit deal and a Democratic US presidential win.
  6. The worst global pandemic in 100 years and the fastest multiple vaccine discoveries in history.

The highs and lows of the 2020 investment journey

From the perspective of risk assets, 2020 provided us with both the heights of exuberance and the depths of despair.

Fixed income - hunt the yield

After the initial COVID-19 shock early in the year, global bond yields resumed their long-running march lower, with the result that an even greater volume of sovereign debt now offers negative real yields. Additional bond purchasing by central banks merely added fuel to the yield compression fire.  Credit spreads were influenced by the same financial largesse and equally, they have narrowed to the point where a growing number of corporate bonds also now sport negative real yields.

Understanding that central banks have effectively put a floor under credit markets, most fund managers are content to stay invested despite the paltry yields on offer.  However, as we enter 2021, they are equally aware that a great deal of optimism about the post-COVID recovery has been priced into credit markets.  Furthermore, managers are also weighing the prospects for higher inflation in the coming year.  The base effects from 2020 alone will register higher inflation rates, which in turn will inspire a keener focus upon duration positioning.

Equities - a year of extremes

At the beginning of 2020, our outlook for equities struck a cautious tone. We were nervous about stretched valuation multiples in some sectors, given a near absence of earnings growth in 2019.  We also noted that the economic cycle – muted as it was - was long in the tooth, approaching its 11th year.

Never in our wildest dreams would we have imagined that a pandemic would be the trigger for a pullback… and what a correction it was! The scale and speed of the collapse was unprecedented, and, in the teeth of the panic in March, many equity markets (excluding the US) looked attractive again when viewed on a long-term basis.  However, the rebound was equally ferocious.  The practical reality was that investors had a very limited window to get involved and by May, a significant part of the rally was already behind us.

The second leg of the market recovery was inspired by the success of the vaccine trials and the focus shifted away from the “stay at home” stocks, typified by the “FAANGs”, in favour of the virus-hit sectors such as travel and leisure, industrials and financials.

The rebound in risk assets was given huge impetus by overwhelming monetary and fiscal support. Central banks offered liquidity support far in excess of that given during the global financial crisis, amounting to north of US$15 trillion globally.

With interest rates near zero in most developed markets and bond yields sub-1% (in the below 10-year maturity band), investors happily chased equities higher and the fourth quarter saw some genuinely silly IPO valuations in the US market, echoing past bubbles.

Thoughts for 2021

Given the scale of the decline in nominal bond yields and the compression of corporate spreads, the opportunities for a capital return from large parts of the fixed income spectrum is limited. This suggests that 2021 will be tough going for bond investors, which is likely to favour those managers with more flexible mandates and approaches.  Alternatively, investors might look to hold a blend of different fund types to help navigate the choppy waters ahead.

In equities, we are presented with some of the same challenges as year ago, together with some new ones.  Broadly:

  • Regions: US equity valuations remain very elevated versus the rest of the world (even accounting for the growth bias within the US indices). Therefore, we are maintaining our underweight stance there, in favour of emerging markets and, to a lesser degree, Japan and Europe.
  • Styles: As vaccination programmes around the world progress, it is reasonable to expect that economies will no longer need to be locked down, at least not to the same extent. The consequence of this for portfolio positioning is not necessarily as simple as it might seem.  It is true that during 2020, the work-from-home directive engendered a step change in consumer behaviour that benefited many technology-powered growth companies, causing share prices to fly.  However, many such businesses are also at the heart of the shift to the “internet of all things”, giving them a growth path into the future. Therefore, making a wholesale switch from growth companies to value companies that stand to prosper in better economic times is probably unwise; rather, a more balanced approach is likely to be a more resilient answer.  In our portfolios, we are re-balancing away from a growth tilt to make space for a stronger showing from value-orientated strategies.

Finally, we have been positively disposed to gold and, increasingly, other commodities as 2020 progressed.  We are maintaining our constructive views given the scale of fiscal and monetary largesse around the world and the prospect of better economic times as the year progresses.

All in all, we expect further volatility this year and we would be well-advised to brace ourselves for market rotations and air pockets in asset prices as the world adjusts to a different phase.

We wish you the very best of luck in 2021 and hope for better times ahead for all.

Read more articles like this on our insights page

About the author

Peter Toogood, CIO, Embark Platform

Peter launched The Adviser Centre in May 2014, whilst employed by City Financial He was co-founder of the original Forsyth-OBSR Ratings Service in 2002. He joined OBSR in 2008 and was responsible for establishing the firm’s fund advisory business as well as continuing to conduct manager research.

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