2020 Review – 2021 Outlook.

In the words of the Von Trapp children in the Sound of Music, “So long, farewell, auf Wiedersehen, goodbye.”

There is no denying that 2020 was a very challenging year and one that we were very pleased to say “good riddance” to, especially as 2021 is likely to reward us with much better times.  In fact, there is no way to sugar-coat it:  2020 was one of the hardest years we have ever experienced, professionally and personally – it was a horrible, intense and emotional year.

The start of 2020 now seems like a world away:  global equity markets started the year in a buoyant mood; Boris Johnson had just won the general election with a large majority and the UK was preparing to leave the EU on 31 January 2020; and in addition to Brexit we had ‘Megxit’, as it was announced that the Duke and Duchess of Sussex would no longer be working members of the royal family.

However, that was pre-coronavirus!

What came next was like a slow-motion car crash scene where we could all see the distant threat in Wuhan (China) coming towards us and we all knew it was going to be an uncertain and fearful situation, but it was one that some couldn’t quite appreciate what it would mean for our everyday lives.

Not only did the coronavirus take (and, unfortunately, continues to take) the lives of far too many people, but thanks to the unprecedented lockdowns and containment measures, the global economy effectively hit a brick wall and ground to a halt during the second quarter of the year which had a devastating impact on the livelihoods for millions of people and resulted in us experiencing the deepest economic downturn in over 300 years.

Although we have lived through many equity market crashes and financial crisis over the years, the coronavirus outbreak was not a familiar experience as it was very different from anything that had preceded it:  this global equity market collapse was not due to the bursting of an economic bubble, or a financial or debt crisis, it was a natural disaster – and the speed and magnitude of the equity market’s descent took everyone by surprise as the market confidence we saw during January turned into sheer panic in just a couple of weeks.  Even the oil price went into negative territory for the first time in history, meaning that oil producers were effectively paying buyers to take the oil!

Oil

And in addition to the coronavirus and the negative oil price, 2020 had a US presidential election (and its aftermath), along with Brexit negotiations – all of which ensured there were no dull moments during the year.

While we have never before been bombarded with so much change in such a short period of time, in the words of Louis Armstrong (‘Satchmo’), “if you have to ask what jazz is, you’ll never know”, and from our investment experience, while the coronavirus was not exactly a familiar situation, we knew that we had to be dispassionate as global equity markets can deal with any eventuality (they just hate periods of uncertainty – and the coronavirus was a big uncertainty).

Consequently, while it was evident that we would suffer a sharp and deep recession, and the resulting equity market volatility would be unnerving, we also strongly believed that the coronavirus outbreak would only be a transient issue and therefore long-term investors didn’t need to be overly worried as we would see a sharp rebound on the other side.  This view was underpinned by the unprecedented government and central bank stimulus, which stopped this becoming a 1929 depression-like outcome with widespread business failures.

Although financial markets continue to be acutely sensitive to news flow on the spread of the coronavirus, lockdowns and vaccines, thankfully the worst is now clearly behind us and confidence is returning – and as a consequence, it is pleasing to say that after dropping by nearly 35% during the first quarter of 2020, the FTSE-100 has started to recover and ended the year down ‘just’ 14.34%.

FTSE performance

Furthermore, in China where the coronavirus outbreak started, the CSI 300 index (which consists of 300 companies listed on the Shanghai and Shenzhen stock exchanges), actually ended 2020 up a staggering 27.21%, as its economy (the world’s second largest economy), recovered the output it lost due to the coronavirus outbreak.

Although our risked portfolios (Cautious, Balanced and Adventurous) have not been immune from this volatility, they have been less volatile and have held up better thanks to our diversification objectives, coupled with some active and tactical portfolio changes.

For example, over the same 12-month period which saw the FTSE-100 fall 14.34%, a typical my wealth ‘Cautious’ portfolio ended the year up 3.18%

CBA performance

Some of our portfolio changes at the start of the coronavirus outbreak included the reduction or the complete sale of holdings in those companies which we believed would see long-term damage, such as Carnival Cruises, Compass, Informa and Melrose Industries.  Due to the heightened level of market uncertainty, these sales predominately increased portfolio cash balances, thus reducing client’s market exposure and risk – as we view our clients’ investments too important to risk if we were to get it wrong (at my wealth, our core philosophy is that if we wouldn’t do it for our mum and dad, then we don’t do it for our clients).

Obviously, with the benefit of 2020 hindsight, we perhaps should have been more aggressive and invested in companies that could potentially benefit from the coronavirus disruption, such as the online food retailer, Ocado.  Despite having plenty of negative social media comments due to capacity constraints which restricted the number of deliveries Ocado could make, coupled with the fact it had to limit sale of certain items such as toilet paper and pasta, the company’s share price rose strongly during 2020, thanks to the significant and permanent shift to online food shopping, with Tim Steiner, the Chief Executive, stating that the UK market has doubled since the coronavirus outbreak!

However, more recently we have started to reduce cash levels held in client portfolios by predominately increasing clients’ exposure to UK equities in order to reduce some of our underweight position in this geographic region.  This has predominately been via the commodity and oil companies (such as BHP, BP, Glencore and Royal Dutch Shell) as we expect the price of oil and metals to move higher in 2021 given China’s appetite for commodities, coupled with a weaker US dollar and a continuation of the economic recovery we have seen since the summer; as the roll-out of the coronavirus vaccines will allow the global economy to fully reopen in 2021 and more importantly, stay open.

We have also increased exposure to sectors such as financials which should not only get a boost from the economic recovery, but also the expected restoration of dividends.

We have also reorganised our US and European holdings.  In the US, this involved reducing exposure to US equity income funds (i.e. those funds that focus on investing in US companies that pay dividends), as these funds are all now starting to chase the same dividend-paying companies, which meant that these funds started to become similarly positioned (which obviously reduces the underlying diversification of our Cautious, Balanced and Adventurous portfolios).

In Europe, the reorganisation skewed the underlying holdings more towards domestically focused companies, which should benefit from the European Central Bank’s (ECB) accommodative monetary policy, as we believe that it is when, not if, the ECB provides additional monetary stimulus.

We continue to favour Asian and Emerging Markets, especially as trade tensions are likely to ease under a Joe Biden US Presidency.  However as not all Emerging Markets are similar (for example, while both China and Greece are officially classified as Emerging Markets, they have very little in common), we have blended our Asian and Emerging Markets funds so that their underlying holdings are more exposed to those countries which responded and contained the coronavirus quickly and those companies that should benefit the most to global economic growth.  Additionally, despite all the coronavirus disruption during 2020, the long-term drivers underpinning many of the Asian and the Emerging Market countries are still intact, for example, the demographic trend with the population of working age people is still growing – and that is important as this supports domestic demand growth and as incomes rise, so does discretionary consumption.

Furthermore, additional stimulus from the major government and central banks can’t be ruled out – and a non-inflationary moderate growth environment with supportive fiscal and monetary policies should be very positive for global equity markets as a whole in 2021.

However, the path for equity markets is never smooth or easy as there will always be periods of market uncertainty and volatility – as Mark Twain said, “history doesn’t repeat itself, but it often rhymes”.

As such, we fully expect the tug of war between the short-term coronavirus impact and the speed of the vaccine roll-out will keep equity market volatility elevated (although hopefully not at the extreme levels we experienced in March and April 2020), with large up-and-down price movements, for the foreseeable future.

However, it is important not to underestimate the potential size and speed of the economic recovery that we will see during 2021/2022 as the roll-out of the coronavirus vaccines will improve consumer confidence thanks to pent up demand, fiscal stimulus and low interest rates – which is all very positive and should not only mean the consumption of toilet paper will be out and demand for traveling and eating out will be back in, but more importantly, drive global equity markets higher during the year.

Consequently, whilst we accept that it is easier said than done amidst the current uncertainties, it is very important to filter out the cacophony of unhelpful market noise and resist the urge for any knee-jerk reactions by maintaining a long-term perspective as the coronavirus outbreak will soon be in the rear-view mirror and will be seen as an economic hiccup; albeit a sharp, deep and painful one.

In the words of the poet Alfred Lord Tennyson, “hope smiles from the threshold of the year to come, whispering, ‘it will be happier.’”

Good riddance 2020, bring on 2021!

Investment Management Team