CATCHING THE WAVE…
All it took was an announcement relating to a COVID vaccine to push the SP500 to new highs. After nine months, a new narrative of a potentially faster than expected return to normal is forming for markets and it is a message to not only absorb but to rapidly implement an effective strategy for. The idea that life could be not only returning to normal – but that economic growth (and by implication returns to equity) would be able to be restored in 2021-is a powerful incentive for equity market investors anxious not to miss the next wave.
Indeed, a look across at China points to what this possible future looks like: Chinese demand is already “back” and the Chinese equity markets - now worth over $10trn - are pushing to new highs. Yet directly accessing Chinese demand growth is less than straightforward for many savers and investors and, looking to 2021, the more obvious question is whether Western economies and markets can provide a similar recovery. If so, then global demand stories – Oil stocks, Commodities, Construction, Transportation and Airlines, Technology - are all now in play, with the ever looser monetary and fiscal positions established over the course of 2020 providing an aggressive tailwind. As sentiment starts to shift in a more positive direction, the sense of remaining a bystander to events is also starting to feel uncomfortable - especially for those who have not significantly participated in the post March Equity rally in the US – and the questioning is getting louder. There are more structural questions being raised too. Should we just “pile in” to equities now that, after 20 years the total return to Equities has finally outpaced the total return to Bonds? The FTSE is now at post March highs but doesn’t “feel” expensive and, as zero-coupon Government debt slides further into negative yield territory (especially in real terms), what role – if any do Bonds now play in global investment portfolios? If 2021 is going to be an Equity story, should global funds pile into markets such as China now? Is it too late? Is it a bubble? Is Wall Street a bubble? What about ESG based investing? Is the “Build back better” agenda a reason to “Go green” or is a large part of the reason for ESG outperformance a simple consequence of the Pharma/Tech rally and should it be pursued even though much of this sector appears to be overvalued and Pro cyclical oil stocks (not part of ESG) are now rallying hard?
As ever, most of the questions that arise are in response to the uncertainties that have arisen over the recent past and, for the most part, relate to the near future. The focus is not unnaturally upon the uncertainties of potential returns on capital and savings. However, investor discipline requires decisions to be made on more than short term sentiment and, whilst the short-term trades that were missed or not taken are worth noting with hindsight, understanding why there was insufficient certainty at the time is actually the more profound question to try and answer. It is also important to not lose sight of the fact that a reduced level of uncertainty over event risk is not the same as the concept of reduced uncertainty over returns.
6 | ADMISI - The Ghost In The Machine | Q4 Edition
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