Well, where should we start with 2020? A few days ago I was reflecting on some meeting notes I had from fund managers this time last year and there was a remarkable consistency as we looked ahead to this year with a positive outlook, with global growth looking set to continue. Boris had just won the election, Brexit was ‘getting done’ and we settled down to our Christmas festivities with a strong sense of optimism. Little did we know…
On 31 December 2019, China contacted the World Health Organisation about a new virus sweeping the country but it wasn’t until 12 January that the news first appeared on the BBC, which reassuringly told us “China has it under control”. Fast-forward to now, and we have over 68 million cases and over 1.5 million deaths across the world from what we now know as coronavirus or COVID-19. Without doubt, it has been a year to forget, with economic destruction, enormous business failure and a debt burden that we will be paying back for decades.
I’m writing this article on the day when 90-year-old Margaret Keenan becomes the answer to a quiz question for the next 50 years, namely, “Who was the first person in the world to receive a COVID vaccine outside of trials?”. It truly is a momentous day and a phenomenal achievement for mankind to come up with a vaccine in such a short period of time and it’s one that gives us all hope that 2021 can see us return to some kind of normality.
However, in those dark days back in March when we got put into our first lockdown, I don’t think even the most optimistic investor would have thought that just nine months later, the MSCI World index would be up over 10% this year and that the best-performing funds in the IA sectors would be up over 100%! Perhaps more important than the absolute performance numbers is thinking about how the world has changed during the past nine months and whether some or all of that change is permanent, as this will shape the economic, corporate and investment landscape for years to come.
It certainly seems clear that COVID has accelerated trends that were already happening. The move to online retail exacerbating the deaths of the high street, the clear reliance on technology in all aspects of our lives, the increase in online meetings reducing the need for corporate travel and the growth of interest in ESG reducing demand for oil are all themes that have been talked about for some time. Without doubt, our experiences over the last nine months and various lockdowns of one sort or another give us a sense that these represent permanent changes in our behaviours and companies benefiting from these changes and others have seen their share prices handsomely rewarded.
However, very often market participants are simple beasts and they extrapolated the new normal as something that would persist forever. They discounted that we would ever go back to doing the things we enjoyed in 2019, such as socialising, leisure activities and travel, and we saw these stocks get absolutely hammered for much of the year on the premise that we would forever be confined to lockdown.
Thankfully, news of the vaccine only a few weeks ago has led to a major reappraisal of the outlook for 2021 and we have seen a massive reversal in market sentiment towards those companies that we perceived to be the losers of COVID. In the first instance, it seems as though the big move has been from the hedge funds which have been following the long COVID winners’, short COVID losers’ trade for months but have now had to rapidly cover their shorts on the vaccine news and therefore driven those battered stocks rapidly higher. Now, it looks more like fundamentals are being assessed and investors are gaining confidence in the recovery potential of so many of these businesses.
So where does this leave us as we look towards 2021? Once again, we look ahead with a positive view of the world but recognise that there are significant challenges ahead. The economic damage caused by having to lock down economies will leave a lasting scar that will take decades to heal and now governments have the tricky task of working out how we pay for it all. Add in Brexit, which is currently in the final throes of ‘deal or no deal’, a new US President, tensions in the Middle East, looming mass unemployment and many other risk factors, and it’s easy to see that 2021 will no doubt bring its fair share of bumps in the road.
From an asset allocation perspective – and we are going through our annual round of analysis right now – it likely means lower expected returns going forwards. That should come as no surprise, given how markets have performed once again this year and the recognition that at some point our global debt mountain has to come with a consequence. Right now, central banks are hoping that consequence is some inflation to help reduce the impact of the debt burden but, importantly, this needs to broaden out from just asset price inflation that has been the legacy of coming out of the financial crisis over a decade ago. We have seen tentative signs of a steepening of the yield curve and, should this persist through 2021, we might start to see more of a sustained change in market leadership that has been talked about many times in the last three years but has yet to take hold.
So, as 2020 draws to a close and in the course of human history feels like a year we would like to forget, we look forward to 2021 with renewed optimism and hope that we can once again start to do all of those things that we previously took for granted.
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