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.
How have portfolios fared in 2020? The short answer is they have performed admirablyWe 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.
Key Points
- 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.
Sector winners
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.
UK Equity Income props up the table, with cuts of 40 per cent from UK dividends being a key headwind.
Government bonds have had a great year – acting as a diversifier at a time when markets fell sharply. At the start of 2020, the 10-year gilt yielded 0.76 per cent, and today it pays 0.29 per cent.
A similar story is seen in the US, where the 10-year Treasury pays 0.84 per cent today and started the year offering 1.88 per cent. Is this surprising when central banks have been hoovering up gilts and treasuries at record levels?
Gold is another asset class that has had a strong run; $1,519 (£1,140) at the start of 2020 and $1,844 today, having closed above $2,000 in the summer. Safety assets have delivered.
Maybe a better judge of client performance are ARC PCI indices. The ARC Sterling Equity Risk index is up 2.34 per cent year-to-date; in fact all four ARC indices are positive in 2020.
Recovery
The performance of equity markets this year bears no resemblance to the last big crisis – the global financial crisis. When Northern Rock hit the wall in September 2007 very few predicted the events to follow, with equity markets bottoming 18 months later in March 2009 and many barely back to pre-Northern Rock days until late 2010 (far longer in Japan’s case).
Quantitative easing was a new and unused tool in central bankers’ pockets. Contrast the speed and quantum at which QE has been used during this crisis and you have the key reason why markets are so sanguine and have rebounded so swiftly this year.
It took more than 10 years in the US to reach $4tn of QE; it has taken less than a year to double the amount again – the UK is a similar story. Rates were cut far quicker this time too, though clearly starting from a much lower base and therefore having less of an impact.
There is also far less caution now from politicians in using fiscal tools and running high budget deficits. Clearly with virtually unlimited money printing, running high budget deficits is far easier. To that end, policymakers learnt from previous errors and acted decisively.
Going back even further, Black Monday in October 1987 saw one of the biggest one-day drops in history, with markets taking 18 months or more to recover to prior levels.
The tech bubble was very different as the FTSE saw a long slow decline from the turn of the millennium until March 2003 – do not forget it took 15 years for the FTSE to surpass the previous peak in capital terms.
All crises are different. The drop in GDP this year could be described as voluntary, therefore the rebound was always going to be different and swifter as many simply could not spend, thereby building up a ‘war chest’.
What seems evident though is high public sector levels of debt are here to stay for the foreseeable future and interest rates are set to remain low. Both of these factors will have a big impact on the investment landscape for many years.
Ben Yearsley is a director of Fairview Investing
