15 Dec 2020
December 2020 | Jupiter Independent Funds Team
Looking to 2021 and considering the lasting impact of Covid-19, the mountains of debt left in its wake and how stock and bond investors have differing views. Through it all, long-term investors, commensurate with their risk appetite, are best served with a diversified portfolio.
As the year closes, equity indices, especially those in the US, are chasing all-time highs. That could have been written a year ago. What a year! Who would have thought within three months of writing the 2020 outlook , the world would be turned up-side down by Covid-19, entire populations would be locked down, the global economy would be comprehensively trashed, central banks and governments would have to make the most significant monetary and fiscal interventions in history to keep the show on the road and by the end of March, global indices (including the technology-heavy NASDAQ) would have lost a third of their value? Therein lies the inherent risk of writing crystal ball-gazing ‘outlook’ pieces!
But taking the plunge, what of the future? Covid-19 will still be dominating events in 2021. With much of the western world battling a second or third viral wave at the end of 2020, the various pipeline vaccines cannot come too quickly for some semblance of normal social behaviour to resume. Not surprisingly markets reacted strongly to the Pfizer/BioNTec vaccine announcement. But post-vaccine ‘normal’ will not be pre-Covid ‘normal’; too much water has passed under too many bridges. GDP growth will recover, but national balance sheets are a mess and eventually the burgeoning debt mountains are going to have to be tackled, though whether through growth, inflation, taxation or austerity remains a moot point.
But change is perhaps more profound. Like it or not Covid has become deeply politicised; many see it is a catalyst for a different future. In many ways it is easier to predict what the future will not be rather than what it will be. There is no re-set button and we simply erase 2020 as if it never happened; societal norms are shifting and moreover they are expected to shift. It extends to the corporate world where stakeholders with their invested human, regulatory or commercial capital are increasingly prioritised over shareholders and their financial capital.
From an investment standpoint, superficially equities have withstood much bad news and uncertainty albeit with a strong dose of volatility. However, there has been a pronounced bifurcation in performance between ‘growth’ companies and the Covid winners, and everything else. So-called ‘value’ companies have been out of favour for a considerable time but as economies begin to recover, perhaps those which are economically sensitive will enjoy an enduring period in the limelight again.
If equity investors are optimists, bond investors are hard-nosed pragmatists, if not pessimists. As lenders, whether to treasuries or companies, they have only two preoccupations: first, will they get their money back on the bond’s redemption date and second, are they being adequately compensated over the duration of their investment to reflect the risk the borrower defaults. Near-term the inflation risk remains benign thanks to slack economies and surplus capacity. As national governments’ Covid recovery extend-and-pretend support schemes eventually recede and the oversupply of labour and capital narrows as economic recovery progresses, opinion is divided whether accelerating money supply through longer-term strategic fiscal stimulus packages risks inflationary pressures to which central banks feel the need to respond with higher interest rates. The past decade suggests structural deflationary pressures may have the upper hand.
Alongside the shifting sands created by Covid, ramifications also weigh from Brexit and the US election. But in this complex environment awash with uncertainties, we believe long-term investors, commensurate with their risk appetite, are best served with a diversified portfolio comprising different asset classes and geographic exposures, as well as blending different investment styles.
Please note: Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.
Important Information: This document is for informational purposes only and is not investment advice. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Issued by Jupiter Asset Management Limited which is authorised and regulated by the Financial Conduct Authority, registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. No part of this content may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited. 26682
