Please find below our Investment Market Update as at 18th December 2020.
Blue Sky Investment Market Update
Let’s look forward
I’m renowned within the team at Blue Sky for looking ahead and not dwelling too much on what’s happened. I’m going to reinforce this view by not anchoring on what has happened in 2020, instead looking forward to what we may expect in 2021.
One paragraph, and one only though, on 2020:
2020 has been a shocker. One which most of us could never have anticipated. A shock of such a magnitude that it shook the foundations of society and financial markets like never before. We’ve had recessions before, but none caused by a health crisis, certainly not in our lifetimes. The swift reaction of central banks and governments around the world halted the dramatic capitulation of equity markets to such an extent that many share prices have risen strongly from March this year. Degrees of confidence were restored. However, the recovery has varied massively from sector to sector and investment markets have reflected this across the globe.
We cannot predict what will happen in 2021. It’s always dangerous to predict and suggest the price of assets at the year end. So many things can happen, as this year has clearly shown. What we can do is deliver a view, so here goes.
Activity to rebound
The expectancy is that there will be a widespread distribution of vaccines by the Spring. As restrictions ease from the Winter and confidence builds with indications that the end is in sight. Economic activity should rebound strongly through the course of 2021.
Monetary stimulus and taxes
At the heart of any recovery will be exceptionally loose monetary policy as central banks focus on preventing inflation from dipping further below target. There is also an understanding from fiscal authorities that next year is not the time to address the large budget deficits caused by the response to the pandemic.
Early in the economic cycle
We are early in the economic cycle, and the risk of a further recession is low. There are limited inflationary pressures aside from Brexit and it is expected that the ‘powers that be’ won’t mind if growth overshoots immediate inflationary targets.
Expensive or not?
Valuations are not perceived to be a problem. Equities may look expensive in absolute terms, but on a relative basis, the equity risk premium – the equity earnings yield minus bond yields – remains attractive.
Sentiment has turned bullish for the first time since the pandemic, and at some point in 2021, it is very likely that markets will price in too much optimism but we believe this will likely be much later in the year.
The green revolution
We have long advocated the merits of investing in companies who embrace ESG (environmental and social governance). In the first quarter of this year, the sustainable sector was the only sector which attracted positive inflows. The pace of change in this sector has been significant and there is no doubt that those companies that have embraced ESG have proved, in general terms, to be more resilient than their mainstream counterparts.
The sustainable genie is out of the bottle and is becoming part of the fabric of many portfolios. Companies are clamouring to improve their environmental credentials and, for once, the investment arena is driving positive change. Exciting!
Quantitative Easing (QE)
Most of us first heard this phrase in the financial crisis of 2008/2009. This turned out to be a trial run for the record levels of QE that have recently been deployed to support markets and economies around the world. The phrase “whatever it takes” is at the forefront of economic thinking.
I like the comment from L&G Investment Management this week when they stated that at its current pace, only a small addition of QE is required to hit £1 trillion on the Bank of England balance sheet. This figure is out of this world…literally. If you were to stack that amount in £1 coins, you would get to the moon and back just under 4 times. Amazing!
As always, we have to be mindful of any possible downside risks/headwinds and for sure, there will be some. However, we are keen to catch the wave of investment that is pouring into infrastructure, technology and environmental initiatives, especially if it’s backed and encouraged by governments.
Don’t hold me to this as it’s not a prediction, but I wouldn’t be surprised for us to experience strong returns across our portfolios in 2021.
This is the last market update of the year, which just leaves me and the team to wish you and your family a very happy Christmas and an extremely healthy New Year.
Enjoy the festive break.
Gary and the Investment Team
P.S. And I managed to say the ‘B’ word only once!
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.