Now’s the time to be liquid and dynamic.
Gripped by the global pandemic, 2020 was an extraordinary year when equity markets had their fastest fall from a peak ever, governments and central banks launched the largest global stimulus package on record and the UK’s GDP fell the most in 300 years. It was therefore encouraging to see markets finish the year in positive territory buoyed by the US election result, positive vaccine news and an eleventh hour trade deal agreed by the UK and EU.
‘In many ways, 2020 was a crash course in investing,’ advises Will Bartleet Chief Investment Officer of Pacific Asset Management, ‘we think that the lessons of last year will remain important in 2021: diversify, ensure that portfolios are liquid and dynamic and perhaps most importantly, stay the course and remain invested.’
In the eye of the storm in the middle of March asset returns were unusually correlated as investors rushed to cash. However, this was short lived as safe haven assets such as gold and government bonds performed strongly in the first quarter of the year, whilst risky assets such as equities recovered sharply in the remainder of the year after plunging in the first quarter. Therefore, multi-asset portfolios were much less volatile than those focused on just equity markets.
As we entered 2021, the headlines were dominated by a win for the US Democratic Party in both runoff elections in Georgia, which left the Democrats in charge of Congress, the White House and the Senate. This ‘blue wave’ enables the Democrats more flexibility in setting policy in the US, and makes it more likely Joe Biden will be able to deploy a significant fiscal stimulus package in the first half of the year.
The global rollout of the vaccine for COVID-19 also picked up pace with the UK and US leading the way and the very encouraging results have increased the likelihood of achieving herd-immunity in a number of countries by the summer. However, there have been some regions that have had a slower start and there is now a global race to immunise populations before the virus mutates into a strain that is resistant to the new vaccines being administered.
The combination of the positive vaccine news, better than expected Q4 corporate earnings, historically low interest rates and further stimulus has led the IMF to raise its global economic forecast for 2021. Together, these factors provide a supportive backdrop for equities, and whilst the strong rebound in 2020 following the sharp sell-off in February and March has left valuations looking stretched, there are areas of the market that will benefit from the cyclical upswing in the economy in the second half of the year where valuations have room to expand, such as emerging markets, Japan and the UK.
Looking ahead, while 2021 offers the prospect of a return to normality and a strong recovery in the global economy and corporate earnings in the second half of the year, risks remain. New strains of COVID-19 emerging, inflation, higher interest rates, rising unemployment and corporate defaults as governments wind down their support and geopolitical factors are all potential headwinds that could lead to bouts of volatility.
Therefore, we reiterate the importance of remaining diversified, liquid and tactically nimble, staying invested and focusing on the long-term plan.
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This communication is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment.