How to Think About Investing in 2021

2020 is a year few of us will miss. However, investors can learn and adapt from bad times as well as good. As the new year progresses, we think they should keep in mind three key themes for 2021 and beyond: 

1. Policy shifts spark strong short-term equity returns

In the wake of Covid, both government and central bank policy regimes have shifted in important ways. Instead of keeping the lid on inflation, supporting economic growth has become the number one priority of governments and central banks. So, we have both ultra-low interest rates and expansionary fiscal policy providing unprecedented levels of stimulus to the global economy. Even though they are already elevated, this may lead to continued strong returns for equities in the short term. However, we expect inflationary pressures to build up over this year as energy prices recover and, as economic growth gathers momentum leading to fears of higher interest rates in the future, shares prices are likely to remain volatile.

2. China is a main source of potential returns

Chinese assets continue to be under-represented in many global investor’s portfolios. For many, including the Alliance Trust portfolio, the first step was to buy offshore Chinese equities. As the Chinese government opens up the economy and capital markets, further opportunities are likely to present themselves. Improvements in fixed income markets means it is now possible for foreign investors to access China bonds offering attractive yields of around 3% and build an economically balanced allocation to Chinese assets.

The rise of China on the world stage may, however, lead to continuing tensions between it and the west over trade and human rights. It can be hard to reconcile the attraction of Chinese assets financially with ESG considerations but on one front at least, the environment, China is improving. Though still the world’s largest emitter of carbon, China is also the biggest investor in renewable energy and committed to being carbon neutral by 2060.

3. Sustainability 

2021 will prove to be a significant year in the transition towards a cleaner world, with the 26^th UN Climate Change Conference of Parties (COP26) due to take place in Glasgow in November. At the same time, the moral imperative to include diverse perspectives, races and life experiences in all spheres of society has been highlighted in 2020. Our view and hope is that inclusion will become a material influence on investors’ choices. In order to manager these imperatives, the need for better practices by governments, regulators, corporates, asset managers and asset owners is clear and growing. 

The nature of investing in a complex world is that change often happens slowly and then all at once. Our three themes (policy shifts, rise of China and sustainability) are no different – it is uncertain when or how fast they will develop. However, we believe they are all likely to drive meaningful change over the next 5-10 years and it will be vital for investors to monitor these themes to be able to successfully navigate portfolios effectively.

Finally, we also believe it will also be important for investors to stay committed to active equity management given:

• The dispersion between the recoveries from Covid-19 of countries, sectors and companies
• The concentration of returns from global equity markets last year in US technology companies. Technology now represents 40% of the S&P 500 index and 22% of that 40% is represented by just five companies which accounted for 54% of the returns from US equities last year. With the bursting of the dotcom bubble in the late 1990s in mind, you can imagine what might happen to index funds if sentiment towards those five companies suffers a sharp reversal. The importance of diversified active management has never been greater.