Perhaps my least favourite word of 2020 is ‘unprecedented’. From company bosses to politicians and fund managers, all have have uttered it; so much so that it is the most overused word, especially as most of the population are aware that this year has been unprecedented.
Going into 2020 many were positive on the outlook, including me.
Boris Johnson had just been elected with a thumping majority, the threat of the hard left taking power had receded, and Brexit and [we were assured] Brexit was on the way to being sorted. Crucially, Covid-19 was unheard of.
We end 2020 in the UK with debt to GDP over 100 per cent, many employees still on furlough (another word that was unused at the start of the year), Brexit back in the headlines and the deepest and sharpest recession in history.
But ignoring that, how have portfolios fared in 2020? The short answer is they have performed admirably.
- The US and Japanese stock markets have performed strongly during the pandemic
- Governments have learnt to use fiscal tools to protect the economy
- Stock markets took longer to recover from the GFC and Black Wednesday in 1987
Looking at the year to date for various major indices first and there is a noticeable difference, not totally Covid-19 related, with the UK a clear laggard on a global scale.
The FTSE is down 10 per cent in 2020 – not great, admittedly, but returning to the previous paragraph we have had the sharpest and deepest recession ever and government debt is still rising.
So, a 10 per cent fall in that context is admirable. Europe has been a ‘so-so’ market, perhaps down to the politics of fighting Covid, but also the perceived old economic nature of European bourses.
The standout equity markets this year have been the US and Japan. US market performance has been nothing short of stellar, despite having a patchy record dealing with the pandemic and President Trump still not conceding the election.
Stating the obvious, but US markets have done well due to some clear winners from enforced lockdowns and working from home: Amazon, Microsoft, Zoom – the list goes on. Many of these companies started the year on an expensive rating and are even higher now.
The US markets reached new all-time highs during November – the UK markets are 20 per cent off their highs and in no danger of record-breaking any time soon.
The other major winner from an equity perspective has been Japan. Unlike the US, it has had a good pandemic, with cases contained despite the elderly population.
It has also benefited from a flight to safety for the yen that often happens. However, probably the key reason for the performance is down to the quality and strength of corporate Japan.
Admittedly the data is a few months old (from Man GLG) but 56 per cent of Japanese-listed companies had net cash on the balance sheet (that is, more cash than debt) compared with 20 per cent in the UK and only 15 per cent for S&P-listed companies. This solidity has been vital in 2020.
From an Investment Association sector perspective, 33 of the 39 sectors have delivered positive returns thus far in 2020. Unsurprisingly five of the six negative performers are UK ones, with the Global EM Bond Local Currency sector the only other to lose money.