Feature – 2021 investment outlook
In the early 1990s the UK was living in interesting times. It was facing recession. Unemployment was rising and it endured a challenging exit from the European Exchange Rate Mecha- nism. The sentiment of the period was perfectly articulated in the title of a number one song at the time by Northern Irish pop group D:Ream, Things can only get better. Fast forward 30 years and the UK is in a similar predicament. It is facing a challenging economic climate, the number of peo- ple looking for work has jumped sharply following the onset of the Covid pandemic and it is adapting to its new trade deal with the European Union. But as 2020 drew to a close, news of a Covid vaccine roll-out sparked hope. Again, there is a widespread sentiment that things can only get better. But will they?
The macro context: A difficult ascent Throughout the summer, the world started getting a glimpse of normality as parts of Asia and Oceania succeeded in control- ling the virus and regional lockdowns across Europe and the US were partially lifted. Nevertheless, the International Monetary Fund (IMF) warned that the global economy was on the brink of a “difficult ascent” and that until the health risks of the pandemic had been fully brought under control, the world’s economy would continue to struggle.
In its growth outlook published in October, the IMF predicted that the UK economy was on track to shrink by 9.8%, nearly double the average level of advanced economies. But in December, as the Covid vaccine was being rolled out in the UK, the Bank of England struck a more optimistic tone. Andy Haldane, its chief economist, predicted that progress with the vaccine would lead to a boost in business confidence. But even within the Bank of England’s Monetary Policy Com- mittee this view is disputed. Michael Saunders, an external member of the committee, warns that the central bank has used up much of its firepower and that the potential beneficial effects of the vaccine had already been priced in. This more cautious outlook is backed by news that less than a quarter of the 40 million doses of the Pfizer/BioNTech vaccine ordered by the UK government is likely to have arrived before the end of the year, due to manufacturing delays. Production of AstraZeneca’s vaccine also faces delays, with only 4 million doses due to have arrived here in 2020. Even if the government managed to vaccinate an average of 2.5 million people a week, the NHS predicts that it would take until the second half of 2021 to vaccinate everyone aged over 50. Mark Fawcett, Nest’s chief investment officer, is just one inves- tor adopting a cautious stance. A vaccine may have been devel- oped, but he still sees Covid as a risk until the drug has been widely distributed.
26 | portfolio institutional December–January 2021 | issue 99
And the pandemic is by no means the only challenge facing the UK economy. The pandemic is by no means the only change facing the UK economy, which is grappling with the effects of its formal exit from the European Union based on a last-min- ute trade deal. For Fawcett, investors are likely to see more volatility, bringing the issue of currency risk back on the agenda.
This view is also embraced by Nico Aspinall, chief investment officer of BC&E and The People’s Pension. While he remains agnostic on whether advanced economies might be entering the stages of competitive devaluation, managing the adverse effects of currency volatility through hedging strategies will be high on The People’s Pension’s agenda. Doug Heron, chief executive of Lothian Pension Fund, worries that an unintended side effect of ultra-loose monetary policy could see prices rise. “The key risk for us is that we will see higher levels of inflation which is usually a natural outcome of such a public finance response. So, we might be in for a period of lower returns across all asset classes,” he says. Nevertheless, as a defined benefit (DB) scheme with a relatively higher exposure to equities, Heron also sees opportunities to capitalise on the long-term innovation created in response to the adversities Covid has accelerated, from the trend for home working to delivery services and online exercise apps.
Equities: Year of the bull?
The desire for things to get better is reflected in the outlook of most asset managers, who have positioned themselves as bull- ish for a further surge in equity markets. At the end of 2020, fuelled by monetary policy, equity markets grew 12%, despite widespread economic damage across the real economy. As it happens, according to the Chinese zodiac, 2021 will be the year of the ox. This might sound better than 2020’s year of the rat, but investors might want to be cautious not to assess the merits of these animals through a Western lens. While the year of the rat, according to the Chinese zodiac, stands for new beginnings, the ox tends to be associated with hard work, dili- gence and persistence. Characteristics that certainly chime more with the average outlook that most institutional investors have for the new year.
Unlike asset managers, most institutional investors appear to be wary that the current pace of stock market growth can be sustained. The vast majority (78%) of institutional investors believe that the current pace of stock market growth is unsus- tainable, according to a Natixis survey of 500 pension schemes, insurers and sovereign wealth funds. Insurers, in particular, have scaled back their return assumptions to 5.5% from 6.5%. At the same time, more than half of the respondents believe that an increase in volatility could provide more opportunities to generate alpha. For Nico Aspinall at The People’s Pension,
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