Although 2020 has had more twists than a Stephen King novel, many of our clients have been pleasantly surprised by the performance of their investment portfolios. We look at the reasons behind such a strong year in investment terms.
In stark contrast to the negative headlines we have all grown accustomed to during 2020, it’s been very pleasing for us to be able to tell our clients that the performance of their investment portfolios has been so resilient over the last few months. The fact is that global investment portfolios – particularly cautious managed – have continued to deliver strong returns.
Of course, this good performance has not been the case throughout all of this year. Back in March, sharp stock market falls were causing widespread panic. After COVID-19 was officially recognised as a pandemic, and the impact of strict lockdowns on global trade became clear, investment markets responded by falling heavily. The suspension of all but essential activities across Asia, Europe and the US has caused investment analysts to change their outlook on the global economy from positive to extremely negative. As a result, global stock markets in March fell by more than 35% from their February highs. Even traditional ‘safe haven’ assets, like government bonds and gold, fell heavily in value. The sell-off in investment markets was then worsened by a dramatic fall in the oil price, when Saudi Arabia and Russia disagreed about oil production volumes, adding more pressure to an already nervous environment.
But the anxiety demonstrated in investment markets caused governments across the world to respond and make superlative efforts to restore confidence. They did this by introducing extremely large measures designed to inject money into economies and support business continuity. These monetary support measures gave investors the belief that widespread business bankruptcies could be avoided, and that the global economy was not really in freefall, but in temporary hibernation.
As the year continued, although the outlook for people coping with the coronavirus lockdown was bleak, global investment markets – particularly equities – continued to climb. While large proportions of the population were worrying about their jobs, about a deepening global recession, and with no indication on when a coronavirus vaccine would be discovered, investment markets were looking almost rosy. By August, global equities had recovered all of the losses from earlier in the year and were back to a positive return for the year to date. From an investment perspective, perhaps the word that best sums it up would be ‘disconnect’.
Looking in from the outside, with a second wave of the virus looming, and with no sign of a vaccine anytime soon, that disconnect may have looked puzzling. But there was a clear logic behind it. Ultimately it was always felt that the crisis would eventually pass without totally destroying the global economy and that governments and central banks worldwide were fully committed to plugging the gap with capital in the meantime. As a result, global investors stopped being fearful and instead started to focus on identifying those companies and regions that would benefit in the short-term and once the global recovery was underway.
Technology stocks, particularly in the US, did extremely well from this renewed optimism, as investors recognised that lockdown and ‘stay at home’ orders would prove beneficial to companies with a big digital or online presence. Elsewhere, investors were looking at Emerging Markets and the Far East as the two regions where the recovery was most likely to accelerate. China in particular benefited from being the first country hit by coronavirus and the first to start opening up – backed by extensive government and central bank support.
Over the last four years, investors have largely managed to set aside concerns over the Twitter rants of President Trump and focus instead on the positive benefits of a Republican-led administration. Conventional wisdom is that markets prefer the low-tax, business-friendly policies of the Republican Party, and would prefer this over the higher taxation and tougher regulation stance of the Democrats. But even so, as the US Presidential election approached, markets were warming to the prospect of a Joe Biden victory. And, even after the chaos caused by the time it took to announce the winner, global investment markets managed to take this uncertainty in their stride. Part of this relaxed stance could be due to the belief that a Democrat President could have the impact of his taxation policies blocked by a Republican-controlled Senate, which in investors’ eyes would be the best possible outcome. Two Senate seats are still up for grabs and will be decided in January, but it is already clear that investors have – for now at least – ruled out political upheaval in the US as one of their biggest fears or likely causes of instability.
While global investment portfolios performed well, UK-focused investments found the going much tougher. There are several reasons for this. First, the UK is a service-based economy, which means that lockdown has had a particularly negative impact. Second, the UK has not led the way in terms of dealing with the coronavirus or supporting its economy – and this has meant its economic activity levels have remained lower than other major economies. And of course, the prolonged uncertainty over a Brexit deal between the UK and the European Union continued to dampen down the prospects of UK companies, and the UK as a whole.
The key question is whether businesses and consumers can survive ‘Lockdown Part 2’ long enough to rebound strongly on the back of their pent-up demand when restrictions are lifted. That relies on employment levels and incomes being maintained. On that front, Chancellor Rishi Sunak’s extension of the furlough scheme through to next year comes as much-needed relief. Some sectors – such as travel, retail and leisure companies – will feel the pain well into next year, not helped by the tightening of restrictions in the lead up to Christmas. This extension is recognition that continued support is needed to see the UK through a difficult winter, and hopefully towards growth in early 2021.
It is impossible to predict what is going to happen but with the approval and administration of both the Pfizer and Oxford-AstraZeneca vaccines, there is finally light at the end of the tunnel. This, combined with the welcome EU-UK Brexit trade deal, means that governments can turn their attention to economic recovery with a degree of optimism and strive for a better future.
But overall, if 2020 has taught investors anything, it is that global investment markets are increasingly resilient and that negative headlines and market volatility does not necessarily mean long-term damage to investment portfolios. That is why we believe it’s so important to resist the temptation to sell your investments during volatile times because markets have a way of bouncing back quicker than expected.
If you are interested in discussing your financial plan or investment strategy with us, please get in touch with one of our experienced financial planners here.
This content is for information purposes only. It does not constitute investment advice or financial advice.