Year-end Review 2020
Investors will never forget this year, although many may want to. In January scant heed was being paid to an obscure flu variant affecting the local population in Wuhan, China – a city most in the West had never heard of. So, in glorious ignorance it was business as usual in Europe and the Americas. Within two months we had a global pandemic on our hands!
Equity markets were already declining when the U.K. (and other nations) declared a national lockdown in March. With what felt like whole economies being ‘closed until further notice’, panic escalated and share prices crashed – U.K. shares fell more than 30% from January levels as we faced the deepest recession in 300 years. Safe havens such as the U.S. dollar and gold attracted significant inflows, pushing their values to multi-year peaks.
The economic impact of lockdown was mainly felt in Q2 – U.K. GDP fell at an annualised rate of 18.6%. Governments and central banks acted swiftly and decisively to provide direct financial support to individuals and businesses, and to make sure there was sufficient, easily accessible liquidity in the financial system. Basically, everyone got paid for most of the missing economic output, causing budget deficits to soar. This cost, and the deficits, continue to escalate as we write.
November’s U.S. Presidential election provided much less distraction than usual, overshadowed as it was by the first coronavirus vaccines. Confirmation that we had several vaccines that worked sent shares soaring – the MSCI World Index rose 12.8% in the month alone. Formerly maligned sectors led the recovery, with Energy stocks rising nearly 30% and Financials nearly 20%.
Just when we thought the year was going to finish on a (relatively) high note, virus infection levels started to rise steeply again, a new strain of the virus was found to be circulating, and governments reimposed stricter lockdowns. The direct economic impacts of the latest lockdown are likely to be less than in March and April, and this is reflected in asset prices, which have weakened but only marginally, and in volatility, which has hardly moved and remains significantly below the levels seen earlier in the year.
Looking ahead to 2021 what can we expect? Firstly, a Brexit resolution in some shape or form. Whatever the outcome, the removal of uncertainty should be beneficial for equities. Secondly, the roll-out of covid vaccines and the very gradual fading of the impact of the virus on all aspects of our lives. Markets always look ahead and are already starting to factor-in economic recovery. In terms of where to invest, the clues have been provided during the quarter we are currently in. There is a cyclical change taking place. Interest Rates are bottoming out, inflation will rise next year, and long duration assets are starting to underperform. It is likely to mean the end of the 20-year bond bull market. In the equity space it suggests outperformance from value and cyclical stocks (banks, industrials, energy, maybe even certain retailers and travel and leisure stocks), high yielders (yield has not warranted any premium over recent years), and on the basis that its relative undervaluation is at a multi-decade extreme, the U.K. market as a whole.
This article does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of our advisors. Past performance is not a reliable indicator of the future. The value of your investment can go down as well as up, and you can get back less than you originally invested.