What a remarkable year we have all been through. From an investment perspective it was one of the most dramatic years we can remember. It seems like a long time ago now, but we started 2020 with a relatively positive outlook, suggesting that, after a very strong 2019, investors should look forward to reasonable returns from equity markets in the years ahead.
With the world equity market finishing up a little over 6% in euro terms, perhaps we could surmise that the outturn was pretty average. However, as we all know, 2020 was a year of extremely high volatility. The market falls in Q1 were a real test of investor resolve and a stark reminder that we need to be able to withstand significant setbacks along our investment journey if we are to achieve our goals.
When we look back at our commentary during the year, it is pleasing to recall that in our Insights note, on the 30th of March, we highlighted the opportunity for long-term investors.
We felt that the combination of attractive valuations, investor ‘panic’ and supportive monetary & fiscal policy presented us with an attractive risk/reward opportunity and that we should be optimistic about a recovery.
Thereafter, we maintained our positive stance, as we continued to observe a combination of reasonable valuations, supportive policy and economic recovery. Indeed, we believe the economic recovery could be very strong indeed, with a ‘carpe diem’ attitude likely to take hold amongst the world’s consumers, as we emerge from the crisis.
The other strongly held view, we re-iterated throughout 2020, was the need to position for an increased pace of digitalisation. This has been a long-held view and whilst one could argue that parts of the market that are benefiting from this trend have become a little ‘overexuberant’ in the short term, it is clear to us that the world economy is undergoing one of the greatest transitions in history, analogous to the industrial revolution. To be very clear, we believe we are still in the ‘foothills’ of digitalisation and thus we continue to position for a changing world.
To address questions around timing and the short term, markets do seem a little extended right now, so we would not be surprised to see a pullback of some sort. This naturally begs the question as to whether we should be reducing our equity exposure, so we can ‘buy back’ cheaper.
However, when we stand back, we see that the world equity market, in USD terms, only broke out of a multi-year trading range late last year and in euro terms the market is still below its February 2020 high.
We also reflect on the fact that there is a lot of capital in the world that ‘needs’ mid-to-high single digit returns and there are very few places for that capital to go. This suggests that more capital could shift into the equity market in the coming year, given the relatively high potential return from equities relative to bonds and cash.
So, as much as we should be prepared for a correction (we always should be!), we should also recognise the potential for markets to ‘melt up’.
So, as we enter 2021, we remain positive and, as we have said for several years now, we look forward to reasonable returns over our clients’ time horizons.
As always, we are delighted to chat and discuss our views further with you.
Happy New Year.
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