As we enter 2021, it is worth reflecting on our expectations at the beginning of 2020 when facemasks, social distancing, and national lockdowns were not yet a part of our day-to-day lives. At the time we were expecting moderate growth and a possible market correction but were also reasonably confident that a global recession was not on the cards.
In other words, we anticipated market risks to be defined by more of the same as in 2017, 2018, and 2019 – trade wars and global protectionism, Brexit, and slow economic reform in South Africa. However, by late February when the novel coronavirus had reached Italy, it began to emerge that 2020 would be a year like no other in recent history!
It has been a wild ride since then, with most countries around the world reporting deep economic recessions during their months of economic lockdown. Central banks and governments were quick to step into the breach with stimulus measures, and markets bounced back quickly after massive selloffs.
Though markets have been volatile in 2020, they have also provided strong returns, especially considering the state of the underlying world economy. Technology stocks delivered exceptional performance, more than compensating for the steep declines in industries particularly badly hit by the pandemic.
Returns that belie the real state of the economy
With returns of 18.4% from the S&P500, 43.6% from the Nasdaq and 16.5% from the MSCI World Index for the year, global equity investors did well in 2020, on the assumption of course that they rode out the deep dip in Q1! Returns in South Africa were not as stellar – an unexpected recovery in the strength of the rand provided some upside for bonds, yet the JSE continued to underperform offshore indices in rand as well as in US dollar terms.
At the outset of 2021, it is clear that the damage wreaked by the coronavirus is not by any means over. The societal and economic impacts of Covid-19, as well as the other political risks highlighted in previous newsletters, did not disappear when we counted down the last seconds of 2020 at midnight on 31 December.
Though markets were cheered by the release of the first vaccine candidates and the subsequent commencement of vaccination rollout programs in many countries, optimism has been tempered by the fear and uncertainty brought about by new waves of infection and virus variants, for example, SARS-CoV-2.
Indeed, Covid-19 and national lockdowns are still a part of our lives, and we have yet to digest the structural shifts from a regional perspective. Just one example is how the GDP gap between the US and China has narrowed during 2020 as a result of China’s ability to contain the virus and resume “normal” economic activity faster than most western countries.
The demons have not yet been exorcised
Likewise, although markets cheered the election of Joe Biden as US President and the signing of a trade deal between the UK and EU towards the end of the year, many underlying tensions remain. The potential fallout from the UK leaving the EU is not completely understood, while the shocking events at the Capitol building this week indicate that elements of US Trumpian radicalism have yet to be constrained.
As for South Africa, despite the battering that public finances and the economy have taken during the pandemic, the ruling party is still not showing much genuine enthusiasm for urgent structural reform. Continued factional battles in the ANC and upcoming municipal elections seem to tilt the scale towards yet more political instability and inefficiencies in 2021. We maintain our offshore bias with conviction in the belief that the rand and domestic markets are vulnerable to both local political developments and global risk-off sentiment. More-over the equity opportunity set is extremely narrow within the confines of the JSE.
With that as the backdrop, the one constant for Dynasty is our belief in following a risk-adjusted strategy without foregoing growth opportunities. Although we humbly recognise our inability to accurately predict the future – Covid-19 caught nearly everyone by surprise – we can still control the positioning of our clients’ portfolios to achieve non-speculative, long-term growth. To quote our January 2020 Market Update:
“Indeed, if there is one lesson to be taken from 2017, 2018 and 2019, it is that investors who sit on the sidelines because they fear a market crash or global recession is around the corner, tend on balance to miss out on the available returns from growth assets. That is not to say that we advise recklessness and ploughing forward without regard for the economic environment, but rather that, sticking to an asset allocation blueprint and a focus on long-term growth and quality will nearly always pay off for the patient investor.”
Our outlook and approach for 2021
When it comes to our house view for 2021, we are making some adjustments to accommodate how the world has changed over the past year: We are finalising research on direct Chinese equity funds with a view to including these in our proprietary Funds, this being in recognition of China’s ever-increasing share of the world economy and the western bias of capital markets and popular media. We also believe that additional alpha can be extracted from less mainstream shares and have incorporated quality small and mid-cap shares into our proprietary Funds. The China Funds, as well as our preferred mid-cap Fund, will be made available to clients on a bespoke basis, dependent on individual levels of risk tolerance.
Although we expect the digital economy to continue growing, we are concerned that many companies in this market may be overvalued. Recent corrections in bellwether technology and digital economy stocks in the US would seem to vindicate this view. We will monitor these developments with keen interest during 2021.
A sector we are avoiding is listed property because the prospects for recovery are uncertain in a world that has shifted to remote working. As an alternative in our multi-asset portfolios, we have included gold as a short-term hedge against further currency debasement. (It is noteworthy that over the past year, gold actually outperformed the MSCI).
For more conservative clients concerned about equity markets, we favour investment-grade corporate credit to provide “non-equity type”/stable returns that are higher relative to cash. We are also maintaining some downside protection on the equity portions within our proprietary Funds via portfolio “insurance”. In this manner, we are able to guard investors against the negative impacts of a severe market correction should this occur.
Our parting thought is that even though any particular quarter or year may offer a convenient reference point to evaluate your portfolio performance and positioning, the duration and timing of market cycles and events are much more random in nature. What really matters is to absorb the lessons of 2020 and to evaluate whether your portfolio is currently appropriately aligned to meet your long-term investment goals.