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The Potential Surprises of 2021

Pascal Blackburne, CIO 2021-01-01

A new year begins, that is widely expected to see the Covid-19 pandemic finally come under control, thanks to mass vaccination, monetary and fiscal policies to remain extraordinarily accommodative and equity markets to continue their upward march. Topping our list of what could go differently – not to say wrong – would of course be issues pertaining to vaccine deployment but also an unexpected surge in inflation.

A tremendous pent-up demand stands to be unleashed once some form of normality in our daily lives has been restored, from the summer onwards most probably. This assumes, importantly, that vaccination campaigns proceed as promised, without production hiccups, unwanted side-effects or lesser effectiveness due to virus mutations.

But while an economic recovery does indeed appear in the cards for the latter half of 2021, we must admit to having some questions as to how the economic system will cope with a sudden surge of spending. For supply is geared to average, rather than peak, demand. To make a somewhat disturbing parallel, we could see capacity issues similar to those faced by hospitals during the first wave of the coronavirus.

Sectors such as travel and leisure, in particular, are liable to experience an overwhelming rush to spend once restrictions are lifted and a large chunk of the population has been inoculated, hence feels safer. In production and transport, too, bottlenecks are not to be excluded if all start to spend at the same moment.

In turn, this could cause consumer prices to move up considerably – if only temporarily. Adding to such inflationary pressure may well be recovering oil prices, driven not only by stronger demand when travelling resumes but also by the ongoing production restrictions in the OPEC+ and, in the somewhat longer term, by the lack of investment in new supply during the past few years.


How central banks (and governments) would react to such a surge in inflation is an open question. They may well yet again change their computation methods for price indices, so as to dampen the upmove, or stand firm by their recently adopted “average inflation” methodology, i.e. tolerate a period of above target inflation (2%). But it is not entirely impossible that they decide on a sudden shift in monetary policy. In which case it might not just be bond markets that suffer. The euphoria that equity markets are currently basking in could also deflate.

Last but not least, a mention of US politics. The Georgia runoff elections appear to have given the Democrats control of the Senate – making Joe Biden’s job easier but possibly a cause of some concern going forward for equity investors with more regulation, increased government spending and higher taxation on the map. And the presidential election saga is not quite over yet. Judging by the storming of the Capitol by Trump fanatics, in a (failed) attempt to prevent Congress from certifying the election results, and the public letter recently signed by all ten living former US defence ministers requesting that the army not be engaged by the outgoing president, it is obvious that the situation will remain tense up to – and maybe even after – the change in leadership.

Hopeful, however, that these vaccine, inflation and political risks will not pan out, we wish our readers a healthy and rewarding 2021!

A Look Back At 2020 Performance

faang Source : Bloomberg

A year ago, little could investors imagine what 2020 held in stake. In fact, had we all known the magnitude of the Covid-19 pandemic and associated economic crisis that was about to unfold, would we have expected global equity indices to close the year in positive territory?

Only a handful of stocks, and not reflective of the “average” company, drove the indices in 2020. Essentially the FAANGs (acronym for Facebook, Amazon, Apple, Netflix and (ex-Google) Alphabet), but also some other large technology companies that benefitted from lengthy “work/shop/play from home” periods. Excluding these “happy few”, the major stock indices went nowhere (see graph). A number of smaller – previously little heard of – names enjoyed a great year too, having been included in one or more (high tech) indices with trendy sector ETFs (index trackers) buying them. Some of those companies saw their shares double or triple in value in no time without reflecting any change in fundamentals (if anything, the pandemic had even a slight negative impact on them), but money flows supplanted valuation considerations for these highly illiquid stocks, moving them into bubble territory.

But overall, our model portfolios delivered a decent absolute return in 2020, finishing the year on a strong note. Supporting this performance was above-benchmark holdings of local Chinese “A shares” and Japanese equities, limited US dollar exposure (thanks to an active hedging policy), hedge fund investments (which had a much better year, at least when it comes to long/short or macro strategies, than in 2019) as well as a successful fund picking.

On the fixed income side, in a year that saw (already low) interest rates fall further and credit spreads contract, our short duration and limited risk stance weighed somewhat on performance. As did our exposure to European equities, whose behaviour was a far cry from the Nasdaq exuberance. Finally, we must also acknowledge the hit from our investments in shale oil and shipping, two themes that had a rough time in 2020 for obvious reasons – but stand to benefit from the expected 2021 economic rebound.

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