A review of a tumultuous 2020 | January 2021



In this episode we talk about 2020, though it’s a year most of us would rather forget, the pandemic led to a global economic shock that established new multigenerational records.

Welcome Daniel. Let’s talk about 2020 first, though it’s a year most of us would rather forget. What were the issues dominating financial markets?

The investment landscape in 2020 has been dominated by the Covid-19 virus, lockdowns and unprecedented policy easing by central banks and governments around the globe. However, it’s not been the only consideration. The US election and UK-EU negotiations have also added to market volatility from time to time.

The pandemic led to a global economic shock that established new multi-generational records. For instance, UK GDP fell by over 11% in 2020, the biggest decline since the Great Frost of 17091.

The stock market has been surprising resilient in spite of these gloomy economic statistics – where have been the winners and losers?

Financial markets certainly took a hit from the Covid crisis - the MSCI All Country World equity index fell 32% in total return terms (including dividends from peak to trough during the year), once COVID-19 new cases spread outside China, while government bonds outperformed as investors became more risk averse2. The low point came on the 23 March when the Fed said that it was prepared to buy US corporate bonds as part of a new round of quantitative easing (e.g. asset purchases).

However, from there, global equities then went on to rally 63% from the trough, supported by – at various points – fiscal and monetary stimulus, economic recovery and hopes of a successful vaccine rollout, to close out the year up 15%3. A good outcome, considering the environment.

The main winners of 2020 were ‘growth’ equities and direct Covid beneficiaries such as Big Tech, following widespread adoption of e-commerce and agile working. Long-term government bonds benefited from central bank asset purchases. In turn, gold gained from concerns about the debasement of the fiat currency system from money printing: the US created 25% more dollars in 2020 than existed previously5.

Despite the virus originating in Wuhan, China was one of the quickest economies to re-open and MSCI China equities rose 28% in 20206. China’s economy benefitted from lockdowns in the West, since services were restricted, but buying goods was not. China even managed to boost its share of global merchandise exports, driven by stimulus in the West creating demand. The biggest losing sectors were energy (-32%), real estate (9%), banks (-11%), with the Covid-exposed UK and Eurozone markets as laggards7.

Let’s look forward to 2021. Are you hoping for a better year ahead? Or have equity markets over-reached themselves?

We maintain an optimistic outlook for equities. The rollout of vaccines and a gradual opening up of economies from lockdowns should encourage households to run down savings rates to sustain consumption. People haven’t been going on holiday or spending in restaurants, which – in some cases – has left them with spare cash.

We expect a synchronised broad-based global economic recovery that supports company earnings. The IMF forecasts that a record 79% of nearly 200 economies will experience growth higher than 3%8. Not only would this recover much of the lost output last year, but it adds support to consensus global Earnings Per Share growth of 28% expected in 20219.

Do you expect interest rates to remain low and for governments to keep spending?

Yes, central bank liquidity should remain highly accommodative. The ECB topped up its pandemic emergency purchase program by €500bn in December to €1,850bn and extended the horizon of net bond purchases to the end of March 202210. In a major policy change in September, the Fed made clear that it intended to “run hot” with regards to maintaining easy monetary policy in order to achieve above 2% inflation. Morgan Stanley forecasts that the combined balance sheet of G4 central bank assets will rise by $3.4trn by the end of 202111. Governments are likely to keep stimulus packages in place until recovery is assured. For example, US Congress recently announced a new $900bn fiscal package to keep the economy growing.

Will the most recent US stimulus package weaken the Dollar?

Yes, it should. In fact, we expect a weaker dollar to provide a further tailwind for global stocks by reducing concerns over the ability of borrowers to pay down large dollar-denominated debts and providing upside to the reflation story. Our dollar pessimism stems the sharp relative increase in debts accumulated by the US from Covid to weigh down on the dollar. For comparison, the US has borrowed $12,800 in debt per capita in 2020 versus $7,000 for the UK, $5,300 for France and Germany and $1,200 for China12.

Furthermore, there is upside for the euro against the dollar after the creation of the €750bn European Recovery fund last July. For the very first time the EU can issue bonds raised at the federal level to help fund financially weaker countries such as Spain and Italy to strengthen cohesion within the union for the single currency.

Given this relatively encouraging macroeconomic backdrop, where do you see the strongest opportunities in equity markets?

Given the constructive macro backdrop for equities, some of the unloved parts of the market could benefit. Cheap “value” equities – such as financials, energy, industrials, UK, emerging markets and the Eurozone - are priced at a record valuation discount to expensive “growth” areas – particularly technology stocks. We see a broadening economic recovery encouraging a rotation into these unloved stocks.

Encouragingly, following the vaccine announcement in early November, global MSCI value stocks have outperformed growth stocks by 6% to year end13. Considering that value has underperformed growth by 48% since the start of 2007, we see room for further outperformance14.

And where do you see the biggest risks?

In terms of the risks, we continue to monitor the sudden removal of accommodative policy, perhaps if inflation returns at a pace that exceeds central bankers’ expectations. There are always fears of another Covid-19 surge, or a disappointment in the effectiveness in vaccines.

As we have seen in recent weeks, it is possible that there will be a mutation to a more virulent form of the virus that leads to more national lockdowns and a double-dip recession.

There is still the risk of unrest in the divided States of America, though we are more optimistic today that the transition of power will be peaceful. We await the results of the Georgia senate race – due today - with interest. This will have an impact on Joe Biden’s ability to deliver on his election promises.

Finally, another area of concern would be the current euphoria in equities and extended valuations in tech and other selected areas of the market. When Airbnb was listed in December, it achieved a higher valuation than the entire hotel industry globally! This could be a source of future market volatility.


1 UK Government, Spending review 2020, 15 December 2020​
2, 3, 4, 5, 6, 8, 13, 14 Refinitiv/Smith & Williamson, 30 December 2020
7 World Economic Outlook, IMF, October 2020
9 European Central Bank, Monetary Policy Decisions, 10 December 2020
10 Federal Reserve, FOMC Statement, 16 September 2020
11 Morgan Stanley, 2021 Global Macro Strategy Outlook, Back to Life, Back to Liquidity, 21 November 2020
12 Barron’s, The Renminbi Will Gain Wider Use Globally, Gavekal’s CEO Says, 5 December 2020


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This episode was recorded on  05/01/2021

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The Pulse from Smith & Williamson

Investment Show: A review of a tumultuous 2020

Episode 17

Broadcast on Smith & Williamson at 09:00, 7th of January 2021

Available online from 10:00 on the same day .

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