Looking ahead to 2021

2020 has been an extraordinary year for financial markets, reeling from the economic impact of COVID-19. As we leave 2020 and enter 2021 there is still a level of uncertainty in the UK. This of course is due to the new variant of COVID-19 and the overwhelming number of infections, which has put pressure on the NHS. However, we are now in the position of having three vaccines available. With the UK Government increasing effort to roll out vaccination to all those vulnerable, we can expect that by the end of February we could see an easing of lockdown. This will hopefully add some normality to the UK economy, and in turn, remove a level of uncertainty.

Having secured Brexit with an agreed deal, this will remove the prolonged underperformance since the Brexit referendum four years ago.

Despite the recent world markets rise of 3.55%, with the UK and emerging market up nearly 5%, I suspect the first and second quarters of 2021 will still have a level of volatility.

Another impact of the pandemic is that many tech and growth stocks have seen future growth expectations happen in nine months, making them the best performers whilst looking hugely overpriced. Maybe there is a correction due, or a rotation into value shares. Another consideration is that corporate debt is massive, but UK households have apparently built up £100bn of unspent cash in the last nine months. One day when we are finally allowed out again, this will rebalance. A lot to consider on top of how the Government will deal with the financial shock that the economy has suffered. There is much to think about this year.

I have previously written about the virtues of Investment trusts and they have certainly proved their worth throughout 2020. As from the strength of the stock market rebound since the crash of last February and March, many London listed Investment companies ended 2020 in a very strong position. From an average premium of 1% over net asset value (NAV) from the start of 2020, many investment trusts plunged to a 22% discount to their underlying asset values in March before recovering to close the year on an average premium of 1.7%. Some investment trusts have also increased their dividends during this period.

There are many value plays to look at, with a number of shares still looking oversold. I have to some extent avoided funds in property, high yield equities, hydrocarbons, and leisure, but I am sure their time will come.  The winners in 2021 will be the companies with strong balance sheets, good management teams, and the potential to deliver good earnings growth regardless of what is happening in the wider economy.

2020 was the year where markets experienced the worst contraction on record followed by a steep recovery fuelled by extraordinary monetary and fiscal stimulus. So if 2020 was anything to go by, this year will be anything but boring.

Stay safe and wish you a Happy New Year.

S.W.Lovelock MCSI