2020 began ominously, with geopolitical tensions between the US and Iran at an all-time high, and simultaneously, a watching world gripped by images of devastating bushfires in Australia. What was to follow cemented this year’s reputation in modern history and is near impossible to summarise in just a paragraph. In the US alone we had a presidential impeachment, a raging pandemic, the largest protests in history, a disputed presidential election, and a global stock market up nearly 7% for the year after a historic collapse in the spring. With that in mind, it is worth reviewing the year just gone, and also look to the year ahead to help better understand how global events may not have had the impact on your savings and investments that was expected.
2020 – An unforgettable year
Geographically, in 2020, markets have been led by the influential US stock market, which is the largest in the world. Sector divergence has been a key theme in markets this year with the likes of Technology (+32%) and Consumer Discretionary (+26%) massively outperforming sectors such as Real Estate (-12%) and Energy (-36%).
The Federal Reserve cut short-term interest rates in March by 1.5% to the 0% - 0.25% range and has recently announced a change in its inflation targeting which is likely to keep rates unchanged for the foreseeable future.
Eurozone bonds performed well throughout the period, particularly as the COVID-19 pandemic unfolded. Commodities and currencies endured a rollercoaster ride as gold and a number of ‘safe haven’ currencies saw significant price appreciation at the height of the crisis. The price of oil collapsed in the early months of the year.
Global equities have seen huge sector dispersion throughout 2020. Growth stocks with the ability to capitalise on the ‘work-from-home’, ‘play-from-home’, ‘deliver-to-home’ narratives performed best at the expense of more cyclical, and some traditional parts of the market.
In relation to stock, rotation dispersions can persist for long periods, however the reversal of trends can be swift and with large impacts. Therefore, a flexible approach is required. Some mean reversion is likely to happen and as the vaccine starts to win over the virus some ‘catch up’ for more cyclical names could occur.
Our geographical preferences are a function of both our views on localised growth prospects, valuations, and the sectoral makeup of the stock market. We favour Eurozone and Asia Pacific and have also increased allocations to Japan in recent months. At a sector level, we are attempting to capitalise on long term structural trends within sectors such as Technology and Consumer Discretionary.
We remain cognisant of the key risks to equity markets, volatility will be evident throughout the year, and our geographical and sector weightings are subject to change in the short-term as market conditions dictate.
Fixed Income outlook
Global interest rates are expected to remain close to record lows into 2021, as the fragile recovery continues after the shock of the COVID-19 induced recession. The Federal Reserve announced in August that it would allow inflation to run ‘moderately’ above its 2% goal.
The scope of monetary policy intervention in both Europe and the US remains unprecedented, with the Federal Reserve likely to continue in its leading role. Monetary policy globally remains accommodative given the perceived fragile nature of the global economy.
Although price action was positive in 2020, as investors sought safe havens, we maintain that the risk / reward backdrop is now skewed towards a cautious outlook for bond markets. Within such a low interest rate environment, real yields remain negative across much of the sovereign bond universe. Zurich Investments continue to be underweight eurozone sovereign debt across our multi-asset funds and the duration of the bonds is below average. Throughout 2020 we have rotated some of our short-term sovereign bond portfolio into corporate debt.
2020 was a volatile year – but not a negative one for investors. Despite the rollercoaster ride in 2020, there are no guarantees that 2021 will be benign for markets. Already we are seeing increased COVID-19 case numbers, issues with vaccine rollouts, and enduring political strife over the US election. However, sticking to long-term goals, continuing contributions, and having an investment manager that can outperform are investment principles that will stand the test of time.
The Zurich Investment Outlook is produced twice yearly by the team at Zurich Investments, based in Dublin, Ireland. This publication, available to download here, provides an in-depth insight into our current thinking and positioning and expands on the reasons behind our economic views. For more information talk to your Financial Broker.