What are the prospects for 2021?
Despite human calamities, economic setbacks and political uncertainty, most stock markets ended the year surprisingly well, and exceptionally well in the United States. What does 2021 have in store for us?
We could not have hoped for better results
The S&P 500 index ended the year up 16.3% and the Nasdaq up 43.6%. By comparison, European indices delivered very poor figures: the Stoxx Europe 600 was -4.0%, pushed down by the UK, with the FTSE 100 falling 14.3% (in GBP).
US indices were driven by technology and internet giants. Apple, Amazon and Netflix, the big winners of Covid-19, gained more than 160%.
In Asia, countries whose stock markets most appreciated were those that best controlled the virus, and whose flagship index includes the most number of technology stocks. The South Korean and Chinese indices rose 31% and 25% respectively. On the other hand, the Singaporean index, which is very concentrated in cyclical stocks, fell by 11% and that of the Philippines, a country very badly affected by the pandemic, shed 9%. Overall, the Emerging Market index increased by 14.5% (in US dollars).
Have the stock markets surpassed the economic reality too much?
It is tricky to answer this question because there are so many unpredictable factors.
That said our belief is that the combination of central bank stimuli, government aid and the promising effects of vaccines should lead to an acceleration in global growth.
If there any are disappointments or delays, we will inevitably see setbacks, albeit temporarily. For investors with long term-savings, we advise staying invested in equities and tolerating volatility for two reasons. Firstly because there is still upside thanks to the expected earnings recovery, and secondly, because the alternatives are costly in the long run, with cash and bonds having negative yields after inflation.
Will the 2020 trends continue into 2021?
The winners in 2021 are unlikely to be the same as in 2020. The 2020 stock performance for Apple (+177%), Amazon (+171%), Netflix (+162%), and so on can hardly be repeated. These stocks have always been expensive but their earnings have consistently exceeded expectations as they have created monopoly situations. In the US, however, the new Democratic administration will take a tougher stance on monopolies. Same story in China, as we have just witnessed with Alibaba. As for Europe, it tackles the lack of taxation that these giants enjoy.
Who could be the winners of 2021?
We remain positive on the technology sector as low interest rates favour growth stocks. But it is preferable not to be overly exposed to tech giants, and rather focus on small-sized innovative companies in areas like Artificial Intelligence, 5G, storage, cyber security, biotechnology and medical innovation.
In addition to growth stocks, we recommend quality cyclicals. The markets that should benefit most from the recovery in global growth are those with many cyclical stocks such as Japan. Now that a post-Brexit agreement has been reached, Britain can be added. It is the cheapest amongst developed countries. The UK FTSE 350 (large and medium-sized companies) has an expected 12-month P/E of less than 10x with an expected dividend yield of more than 4%.
Emerging markets should also do well, helped by a weaker dollar and an expected rise in commodities. Industrial metals, particularly copper and nickel, should benefit from the energy transition.
In the US and Europe, small- and mid-caps should outperform large caps.
What should not change is the outperformance of SRI/ESG themes. Companies that provide solutions to today’s issues will have wind in their sails for several years to come.
We wish you all a very happy and healthy year.