It has been said many times that 2020 has been a year fraught with uncertainty. Financial markets have swung from difficult lows to unexpected highs, while the wider economic environment has been tough for businesses and individuals alike. In the midst of this, the Alliance Trust investment committee and its team of nine stock pickers have been monitoring markets, valuations and the underlying companies within the global equity portfolio, to ensure it remains on track and focused with a long-term outlook. The future remains uncertain, but there is cautious optimism among the investment team amid the vaccine roll-out against Covid-19 and hopes for economic recovery. As we enter a new year, we have gathered the head of the investment committee and some of our nine stock pickers to explain their expectations for the next 12 months.
Craig Baker Chairman of the Alliance Trust Investment Committee and CIO of Willis Towers Watson
Financial markets always face uncertainty, but as we enter 2021 there is more reason than ever to be cautious and avoid betting on particular countries, sectors or investment styles. We are in the midst of a global pandemic and, despite positive news on the vaccine front, there is still a lot that could go wrong, not least the policy responses, which could vary widely between governments. Any rise in inflation expectations or significant tax changes could dramatically affect the style or sectors driving the market. For that reason, we think it’s vital to have a diversified portfolio focused on stock selection rather than macro factors as its key driver.
Bill Kanko Founder and President of Black Creek Investment Management
We expect widespread vaccinations in the first half of the year to lead to a recovery in the second half. This post-pandemic recovery should favour a broad rally in stocks, helping to rebalance equity markets that have become heavily biased towards larger companies and momentum stocks such as Tesla, Apple and Microsoft. Small to mid-cap stocks should benefit from an economic recovery once the current crisis abates.
US equity growth stocks look priced for perfection. Current equity valuations suggest that a market rebound will favour the UK, Continental Europe and other international and developing markets over the US. We expect Asian economies, which except for India have handled the pandemic more effectively than much of the West, to lead the post-Covid recovery. Chinese growth is already back to pre-crisis levels, and with an expected improvement in China/US relations under Biden administration, it looks well placed to be a leader in the recovery.
A CAUTIOUSLY OPTIMISTIC OUTLOOK
We are acutely aware of the forces at work on global markets, however, we take a bottom-up approach. For Black Creek, successful investing requires evaluating companies on a fundamental basis and taking a long-term view, rather than positioning portfolios based on any short-term market views, which are inherently unreliable. As always, we will continue to look past current trends and the noise of the markets and use volatility to our advantage as we invest in a portfolio of winning businesses at attractive valuations.
The start to 2021 will likely remain challenging given volatility caused by disappointments in economic activity due to further pandemic-related lockdowns. However, the delivery and distribution of vaccines in the first half of the year should lead to an economic recovery in the second half given pent up demand.
Equity markets have become increasingly beholden to accommodative central bank policies and low interest rates. Areas such as large cap tech stocks, EV manufacturers and new IPOs are plagued by high valuations and unrealistic growth expectations. We believe that post-pandemic, equity markets will favour a broader rally in stocks and help rebalance equity markets that have become heavily biased towards growth and momentum stocks.
Rajiv Jain Chairman and CIO of GQG Partner
Despite a recent resurgence of Covid-19 cases, markets continued to move in full force for much of the final three months of 2020, with commodities and bond yields rising on the back of a declining dollar and rising inflation expectations. With the rise in interest rates, the spread between two and ten-year Treasuries hit its widest level since February 2018, a potential sign of improving global economic conditions. Additionally, increased improvement on the global vaccine front saw a re-rating across a variety of economically sensitive sectors, and this certainly was reflected in recent market performance. However, we find ourselves questioning the sustainability of some of the recent rally in highly economically sensitive areas given the lack of clarity on vaccine distribution and uptake. While we remain cautiously optimistic for 2021, and do believe select cyclical stocks will do quite well, we also believe that certain industries have indeed run too far too fast, as some parts of the market are now trading at levels higher than their pre-Covid levels despite a lack of upward earnings revisions combined with degrees of structural business impairment.
A QUALITY AND SECTOR–AGNOSTIC APPROACH TO STOCK SELECTION
We believe a balanced approach is warranted, given a lack of margin of safety across a spectrum of companies, with a lack of clarity on future earnings growth heading into 2021. As is always the case, our quality, sector-agnostic approach allows us to focus on the question of ‘What are we receiving for the prices we’re paying?’ regardless of where a company falls on the style box or factor bucket spectrum.
We continue to find bright spots across areas such as healthcare, where we believe select companies continue to benefit from secular tailwinds combined with attractive valuations. Even though we do not build portfolios by purchasing entire sectors, it is interesting to see, when using the S&P 500 as a proxy, that the healthcare sector is the only sector this year, up to the end of November, to simultaneously see positive forward earning-per-share revisions, yet see price-to-earnings multiples fall. If earnings are like gravity, and we continue to believe that they are, then 2021 could be quite robust for these companies.
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