After a year of twists and turns, 2020 is ending in the same funny old way it started.
In early November, in the space of barely a few days, two major events – Joe Biden’s victory in the US presidential campaign and the discovery of anti-Covid vaccines (with, going by the clinical trials, a very high efficacy rate) – are bringing new perspectives to our world and our economy.
Markets were quick to hail these two announcements. Of course, although the vaccines herald a form of normalisation within a given time horizon, the pandemic will leave deep scars, some already visible, others bound to spring up in the long run.
1. We expect that the roll-out of vaccines, combined with political support, will accelerate growth beyond the automatic catch-up following the recovery from the “Great Lockdown”.
Although the pandemic resulted in deaths and job losses in 2020, the launch of a vaccine in 2021 should reverse the trend and bring us closer to to normality. The rapid recovery in the third quarter in the Western world and the continued expansion in Asia, where a second wave of infection has largely been averted, will serve as a benchmark for the near future. As a first step, solid economic data should support recovery from the “Great Lockdown”.
We are confident that fiscal and monetary policy adjustments will survive the threat of the virus and sustain the recovery. In Europe, the European Central Bank’s (ECB) multi-year multi-billion emergency pandemic procurement programme and the commitments made for recovery are further decisive steps towards solidarity. In the United States, the US Treasury’s policy should be fully aligned with that of the Federal Reserve. These interrelated fiscal and monetary policy measures should support the transition from an automatic rebound to a full-fledged recovery and expansion of growth and profits over several years.
2. New challenges to be met without delay.
Will this recovery last? New uncertainties will have to be quickly dispelled: political (end of the Merkel era in Germany next September, the upcoming presidential elections in France in spring 2022, mid-term elections in the United States in November 2022 etc.) and monetary, as further adjustments will appear increasingly unlikely following the economic recovery. A premature tightening of monetary policy, thus unfavourable to equities, cannot be ruled out, with China and Germany appearing the most likely to take such measures.
3. Investors should start the year by taking advantage of the recovery with a stronger focus on small and mid-caps and on sectors undervalued by the market, such as banks.
Clearly, the economic recovery should encourage the rotation of investors into so-called “value” stocks (i.e. high quality but undervalued by the market) already observed in the final months of 2020. The unprecedented $7 trillion increase in the balance sheets of the US, European, UK and Canadian central banks in 2020 has convinced investors to adopt equity rotation through economically-sensitive small- and mid-caps, and hard-hit value sectors such as banks.
The expected recovery in economic growth usually leads to a rise in long-term rates. However, as mentioned above, since the great financial crisis of 2008/09, central banks have not only controlled short-term rates through policy decisions, but have increasingly focused on long-term yields through the policy of “quantitative easing”, a set of unconventional asset repurchase techniques that reinforce the accommodative nature of their policy. In this context, Candriam believes that the volume of bond repurchases by the ECB cannot be offset by the volume of new issues on the market. The incentive programmes put in place during the “Great Lockdown” of 2020 imply that the gap between short-term and long-term rates remains under control.
Moreover, the differential between US real rates and those of the Euro zone, combined with persistent joint (trade and budget) deficits, seems to indicate a further weakening of the dollar until the first half of 2021. While supporting US corporate profits growth, this leads to a preference for investment outside the United States. In particular, there is a strong case for emerging market assets to outperform both local currency equities and bonds. A weaker U.S. dollar is good news for Latin American countries due to the high cost of servicing their dollar-denominated debt and the support it provides to commodity markets.
4. The pandemic has demonstrated that including long-term investment trends is useful in building a strong portfolio - environmental solutions, digitalisation and healthcare represent our strongest thematic convictions in this regard.
The pandemic has demonstrated that portfolio resilience can be strengthened by incorporating long-term trends that have become even stronger in 2020. We advise keeping the long-term “winners” of the crisis: strong governance seems to have produced better results during the pandemic. Sectors and countries that have shown resilience during the pandemic and are likely to continue to attract investors beyond this year include technology, healthcare, China and Germany.
We also believe that sustainability will continue to grow in importance: solutions for a cleaner future show high growth potential, fuelled by innovation. In this respect, we welcome the convergence of the three main players - and polluters - the United States, China and the European Union -- in their fight against global warming. We retain climate and environmental themes in our portfolios for the long term, as we are convinced that they will be a key component of the first half of the 21st century. In particular, we expect the clean energy and renovation sectors to be at the forefront of new investments to achieve carbon neutrality targets.
5. Let’s learn the lessons of 2020: this pandemic year has shown that human ingenuity has prevailed. For investors, this means agility and active portfolio management.
Active portfolio management should once again be rewarded as much good news has already been anticipated since the first announcement of an effective vaccine in early November - as evidenced by the record levels of stock market indices worldwide. We believe that 2021 will be a year when portfolio managers will need to be agile, and active management will be rewarded.
As some major hurdles have been overcome, the investment horizon has broadened somewhat and our convictions have shifted towards a riskier position. This has resulted in an equity portfolio that is more sensitive to market movements (both up and down) and an overweight position in equities within the portfolio itself.
One of the lessons of 2020 is that human ingenuity has prevailed under the most difficult conditions. This leads us to remain hopeful as we enter 2021.