Happy New Year! I trust everyone had a safe and healthy holiday season.
If you told me back in March 2020 we would end the year with a positive rate of return I would never have believed it. Yet here we are living in one of the most uncertain times of a generation and the stock markets are at all-time highs. Selfishly speaking, our portfolios continued to build upon the extraordinary returns achieved in 2019 with significantly less risk than the stock market indices as a whole!
As I stated in my last communication, the unprecedented monetary and fiscal policy implemented by Governments and Central Banks worldwide effectively set a floor to the rapidly declining market and quickly rebounded looking beyond the pandemic into 2021. Unfortunately, this event has created a “K-shaped” recovery which means some industries and households continued to grow whereas some began and continued to decline. Furthermore, it has widened the gap between the “haves” and “have nots” in society even further. Households with real property (real estate) and marketable securities (investments) prospered and those without did not benefit whatsoever.
The theme for 2020 was “new-economy”, “stay at home stocks”, digital and environmental transformation sectors, and healthcare performing strongly. In contrast, “old economy”, banks, energy, telecoms, airlines and leisure performed poorly. In short, anything technology benefited and in effect was the sector contributing to the record levels achieved by the stock markets.
On the global side, equity markets are riding near all-time highs as well despite the pandemic’s backdrop due to Governments and Central Banks sustained support through the year. With a Brexit deal, Europe-wide fiscal supports and stimulus around the world, economic prospects for the next 12 months and beyond seem brighter.
As vaccines are distributed, people should become more comfortable going out again. Activity in face-to-face industries, such as travel, hotels, restaurants and in-person entertainment, should pick up substantially in the second half of 2021. A smoother rollout of vaccines could potentially lead to early herd immunity as well. In addition, due to many restrictions, households are sitting on significant savings which will be unleashed once they are free to live the way we remember pre-Covid. Consumer spending is a major driver for economic output!
What lies ahead for 2021?
1. Active investing will outperform passive investing
2. Value will outperform growth
3. Mid-caps will outperform large-caps
4. Emerging markets are poised for recovery
5. Dividends will not only continue, but increase
What are the risks to a recovery?
1. Problems with the vaccine rollout
2. Geopolitical and trade tensions do not subside
3. Fiscal and/or monetary policy tightens
4. Interest rate/dollar shock
5. The U.S. political transition
6. The U.K. economy post-Brexit
To conclude, 2020 has set such a low bar that anything can be perceived as being better. However 2021 will be better but not without bumps along the way. Our portfolios continue to hold bonds to protect on the downside. It also receives dividends to pay us as we ride the bumps. Yet a large concentration of our low-medium risk holds value stocks which will benefit in 2021.
As always do not hesitate to contact me if you have any questions. I wish you a safe and healthy 2021!