In the January issue we look back on a tumultuous year and discuss the opportunities for the year ahead.
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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. The US election and UK-EU negotiations provided further risks to markets. 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.
In financial markets, the MSCI All Country World equity index fell 32% in total return terms (including dividends from peak-to-trough during the year), 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). 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.
The main winners of 2020 were ‘growth’ equities and direct COVID beneficiaries such as Big Tech, following widespread adoption of e-commerce and working from home. 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 previously4. Despite the virus originating in Wuhan, China was one of the quickest economies to re-open and MSCI China equities rose 28% in 20205. 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 the laggards in geographical terms6.
Loving unloved stocks in 2021
We maintain an optimistic outlook for equities for four reasons. First, the rollout of vaccines and a gradual opening up of economies from lockdowns should encourage households to run down savings rates to sustain consumption - see our November Investment Outlook.
Second, 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%7. 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 20218.
Third, central bank liquidity is still projected to 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 20229. 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% inflation10. Morgan Stanley forecasts that the combined balance sheet of G4 central bank assets will rise by $3.4trn by the end of 202111.
Fourth, we expect a weaker dollar to provide a 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 from the sharp relative increase in debts accumulated by the US from COVID. 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 an 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 the constructive macro backdrop for equities, we see some of the unloved parts of the market could benefit. Cheap “value” equities (e.g. financials, energy, industrials, UK, emerging markets and the Eurozone) are priced at a record valuation discount to expensive “growth” (tech, US). The UK should benefit from less uncertainty now that a trade deal has been agreed from the EU. 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 total returns have underperformed growth by 48% since the start of 2007, we see room for further outperformance14.
In terms of the risks, we continue to monitor; i) a sudden removal of accommodative policy, perhaps if inflation returns at a pace that exceeds central bankers’ expectations; ii) fears of another COVID-19 surge, or a disappointment in the effectiveness in vaccines/a mutation to a more virulent virus; iii) social unrest in the politically-polarised United States (see our December Investment Outlook); and iv) extended valuations in some sectors (e.g. technology) bringing about a broader market rout.
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
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.