2020 Investment Market Review – The Year of the ‘Black Swan’ & What to Expect in 2021
A Black Swan?
A ‘Black Swan’ event is an unpredictable event characterized by its extreme rarity, severe impact, and the widespread insistence it was obvious in hindsight.
2020 certainly fits this definition. We have seen upwards of 2 million deaths globally, of which 2,500 were here in Ireland. The past year has tested us all in many different ways.
Stock Market Implodes in February
Sudden and unexpected events are also reflected in financial markets and Covid-19 was no different. 2020 was a rollercoaster year for financial markets. A positive start in January was quickly followed by one of the biggest and fastest stock market crashes ever recorded, with -40% drops in major world indices in less than 3 months during February, March & April.
Subsequent actions taken by Central Banks and Governments to flood the financial system with cash and support companies and provide Covid 19 payments for individuals was unprecedented. This level of support encouraged investors to return to the markets, the end-result being a positive end of year gain for most stock markets despite rolling lockdowns all over the world. The standout exception to this being the UK, which had the added shock of BREXIT weighing on investor sentiment.
World Equities + 15%
North America Equities +20%
Japan Equity +9%
Eurozone Bonds (5 yrs plus) +7%
European Equities (ex UK) +2%
Euro Property -10%
UK Equities -13%
Under the Hood
As with anything though, the devil is in the detail! It is worth noting that whilst the recovery in stock markets from May to December was impressive, different sectors / equity markets had very different experiences. For example:
Consumer Discretionary +26%
Real Estate -12%
The recovery in markets, particularly in the US, has been largely driven by Technology Stocks & the ‘Stay at Home’ sector. For example, Tesla, Apple, Facebook & Amazon have all seen stellar growth in 2020, actually benefiting from the current Covid Crisis.
If one takes out the extraordinary performance of the Technology Sector, some of the more traditional industries are only now beginning to gather momentum.
So, What Can We Expect in 2021 for Investment Markets?
A Good Start
2021 has already seen investment markets continue the recent rally. Central Bank supports have allowed Governments to borrow money at incredibly low interest rates which means money is finding its way into the global economy through government spending. The lessons of Austerity from the last financial crisis have been hard learned and most central banks and government acknowledge that cutting spending to balance the books will not work this time. We expect government borrowing to rise around the world with increased government spending on Covid payment supports, infrastructure projects, back to work training, and much more.
Negative Interest Rates
In addition, with banks now starting to apply negative interest rates to personal and company money on deposit, the considerable level of cash held in Irish and global banks will be put to use and either spent or invested. There is currently over €120 billion on deposit in Irish Banks alone, earning almost 0% interest, or in some cases negative interest rates.
A Positive Year Expected
These two factors, despite the spectre of Covid remaining with us throughout 2021 should see financial markets perform positively over the course of 2021, albeit with some volatility as `the world continues to suffer from the effects of the Pandemic. There are undoubtly many twists and turns to come yet.
What Sectors offer good value for investors in 2021?
We expect a broadly positive year ahead for most financial markets with particular emphasis on some sectors such as:
Technology and ‘Stay at Home’
We expect some of the recent Technology and Stay at Home sectors to continue to perform well. They may become less attractive in late 2021 as investors search for value in other under-performing areas, but they will still have a strong year.
Banking and Energy
Banking & Energy was a poor performer in 2020, and also for a number of years before that. As investors seek value in 2020 these industries may see a bounce.
UK Equities for obvious reasons saw a very poor year in 2020, with the FTSE 100 down 13% last year. It is now trading at levels last seen in 2014, which may offer long term value for new investors.
Property, as we have seen in Ireland, continues to perform strongly despite the downturn. This is primarily due to the fact that the property / home buying cohort in the Irish economy have so far not seen a drop in income due to their ability to work from home. Those who saw the biggest drop in income and suffered job losses were in the retail and hospitality sector, which traditionally offer low paying jobs meaning those people have largely struggled to enter the property market even in non-Covid times.
Commercial Property however has seen a reduction in value in 2020 of circa 15% as this market is very dependent on Office and Retail. There are undoubtly going to be long term structural changes to the commercial property market as a result of changing consumer and working patterns, but it remains to be seen what this long-term impact will be. It is possible that city centre retail space for example will be less desirable, but out of town shopping units with parking, more space and storage will benefit. Also, the office market in smaller regional towns may benefit with companies deciding to spread their work force over a larger area closer to regional population centres & provide for regional hubs for their employees.
Don’t Chase the Big Gains
Most importantly, its crucial any investor, with company or personal cash or with their pension, ensure they spread their investment as widely as possible. Making a 700% gain on Tesla is fine when it works, but most of us remember the painful lessons of the DotCom bust in 2001 which saw some Tech Stocks fall by 80% in value and take years to recover. It’s a cliché but having a well-diversified portfolio which can smooth out the peaks and troughs of good and bad years is the most practical way to make your money work long term.
Thank you for reading and take care.
Michael Coburn and Jim Doyle
Serving the South East, Midlands, East Coast & Dublin
Phone Joanne on 01 5260770