I do not want to dwell on 2020, apart from you leaving with two thoughts, “don’t fight the Fed” and our age-old mantra “the power of staying invested”.
These are my initial thoughts of what to expect in 2021:
We have finally accomplished against all the odds a Brexit deal which on the face of it seems to tick most of the boxes, albeit excluding the financial services industry. I am of the view that the financial sector may experience some short-term hiccups, but due to the UK’s pre-eminence in the financial markets and its ability to evolve, these headwinds should be short-lived. The UK market is by any metric undervalued and just as importantly under-owned. I am of the view that the UK equity markets should outperform in the coming year. Whilst everyone is talking about a rotation from growth / quality to value plays, I believe we shall see a more nuanced change, with value stocks catching up with growth and investors allocating more to the UK.
Biden appears to have secured the presidency and the jury is still out on whether he gains a majority in both houses, results to be declared early January. The Fed is committed to doing all that is needed to support the economy and government, having just passed a pandemic relief bill. US equity markets continue to reach all-time highs and whilst this is supportive of global markets, I feel further outperformance is not a given. Stellar gains in tech stocks are unlikely be repeated in 2021, but I am not suggesting that the “FAANGS” should not be owned, as they are still very much the future.
The outlook is a little murkier, although relevantly undervalued and under-owned, with a plethora of good companies. I believe politics, following the fallout of Brexit, huge deficits and potential disharmony from EU members, may emerge in 2021. This area is not to be ignored but we are slightly wary.
There is no doubt that Asia’s response to the COVID pandemic has been more robust and successful than Europe’s. Economies should therefore be in a stronger position to take advantage of a global economic recovery when it occurs. China will still be the engine of growth and whilst we all have moral concerns with regards to human rights, China will continue to be a global powerhouse, and to ignore its potential would be dangerous.
Has the potential to be the joker in the pack. For those of us old enough to remember the late 80s and early 90s when the equity markets were on a roll, it is very difficult to stand in their way. With the Japanese population innate savers, it would only take a slight change in sentiment for the equity markets to gather steam. It should be stated that we have had many a false dawn since the euphoric days, but if you were a gambler (smart investor?) a stake in the potential is advised.
I believe you all know my views on the bond markets. Whilst bonds have always been a diversifier and a dampener on volatility in the past, I can see no value in sovereign or high-quality bonds, with many of these instruments producing negative yields. However, high yield credit should offer opportunities in a potential global economic recovery.
Another asset class that would normally have a place in our portfolios. We have made the decision that investing in this asset class through an OEIC structure, is now not appropriate. With the pandemic changing the entire landscape for commercial property, it will take some time for the dust to settle, but there is no doubt that there will be some winners and losers. Accessing this market will entail much thought and due diligence, with REITs and investment trusts being possibilities.
All my thoughts above are dependent on how the world economy performs. Central banks are united in supporting the economy, whilst the measures taken so far are relief, further action will be necessary to stimulate. Interest rate rates are to remain low, even possibly negative in the UK. COVID will be at the centre of our minds for months to come, but with a successful roll out of vaccines I believe we will see a sharp recovery in consumption and therefore a sharp rebound in economic activity in the summer. My only major concern is the spectre of inflation which again only us oldies will remember!!
In conclusion, I am bullish on global equity markets, but currency movements will have their normal effect on investment performance. I would expect the £ to appreciate over the coming year which may have a dampener on our unhedged overseas holdings. There is always a danger of a black swan event such as war, another pandemic, trade conflicts etc which we should be aware of when constructing the portfolios. There is never a free lunch!