Quarterly Investment Newsletter Winter 2021

Wed 20 Jan 2021

Had you somehow been fortunate enough to have slept through 2020, you would have awoken to find that global equities had risen by nearly 16% during the year and could be forgiven for thinking that the world economy was in rude health. The reality is, as we are all too aware, altogether different with buoyant markets owing their gains mostly to the monetary and fiscal measures put in place to combat the effects of Covid-19, and partly to an optimism that that this year will be far better for businesses than last. A continuation of loose monetary policy also helped provide positive returns for bonds. Gold benefitted from its safe-haven status and a fear of rising inflation to post a 20% return for the year. Commercial property and Oil suffered steep losses as a direct result of lockdown measures.

Beyond the headline numbers there has been a huge dispersion between the returns in different sectors, with those which benefitted from enforced changes in working and social patterns, e.g. technology and online retail, massively outperforming sectors such as travel and energy. These sectoral differences were reflected in geographical returns, as the tech-heavy US market saw significant gains whilst the UK market, with its exposures to banking and energy stocks, was one of the few markets which lost money during the year.

The announcement of successful vaccine trials during November certainly played a large part in reviving stock market optimism, and though we, like most, hold an expectation that economic activity might be less encumbered by restrictions come springtime, we must acknowledge that our short term economic fate depends on the course of the virus. Beyond this, we must then consider what are the lasting socioeconomic effects of the pandemic and whether such an extraordinary episode in our history might be a catalyst for economic restructuring and refocusing, or might we simply return to something resembling the old norms. These questions are not just interesting, they are important for the medium term prospects of sectors and asset classes, and it would not be too surprising to see similar dispersion in investment returns in the years to come, though not necessarily in the same pattern as seen last year.

Elsewhere, geopolitics continues to influence markets, not least here in the UK where a Brexit deal was announced giving much more certainty about the future trading relationship with the EU. Not all questions have been settled, notably the nature of financial services trade, a key part of the UK economy. Further, the compromise reached to ensure a ‘level playing field’ does not allow for a full stop at the end of the Brexit process. Nonetheless the deal does largely bring to an end a long period of uncertainty for the UK, and obviously avoids the unfavoured no-deal option.

At our January meeting the Investment Committee voted to make changes to our portfolios which move closer to our new strategic asset allocation. These changes include a greater weighting to overseas equities (with some currency hedging), a move away from sovereign debt towards a more diverse range of bond investments, and the complete removal of commercial property funds. Within our tactical positioning we hold the view that what worked well last year may not do so this year, and therefore favour the UK geographically, and have reduced exposure to ‘growth’ stocks.

I hope you find this newsletter interesting and relevant to you, and I would very much welcome any feedback you may have.  Please do feel free to get in touch with your thoughts either by phone on 0207 063 4259, or by email on david.baker@mazars.co.uk.

-David Baker, CIO