The Impact of a Global Pandemic.
The negative aspects and implications of Coronavirus have and will continue to be well documented. There is no doubt that a global pandemic and countrywide lockdowns cause immense damage to health, wellbeing, economic and financial stability and in such circumstances, it is difficult to see any positives. As with all crises, the consequences are never evenly spread and some people, unfortunately, suffer more than others.
As investment advisers, it is our job to manage client assets in all economic conditions and advise accordingly. To do this effectively, it is important to sift through the tons of information and focus on the fundamentals that drive markets and investment returns.
Over Valued Markets.
Entering 2020 and pre Coronavirus, it was our view that global stock markets, particularly the United States, were over valued. Following the global financial crisis of 2008, the next decade saw average equity returns of 12.9% per annum in the US and 8.1% per annum in the UK. (Source; Sarasin Compendium of Investment 2020 Edition). The MSCI World (exc uk) index recorded average annual returns of 12.1%, which meant that most markets were enjoying the rally.
Unfortunately, the growth in share prices for many businesses was not supported by productivity and profits which called into question the validity and sustainability of the rally. Government and central bank stimulus and low interest rates appear to have attracted investors to growth assets, in the search for yield, with equities being the main beneficiary.
Our existing clients enjoyed the benefits of equity growth and we capitalised on this by taking profits and increasing cash weightings. For new clients, the situation pre 2020 was quite frustrating as we were recommending investment strategies but advising that we should delay making equity investments and remain in cash.
From an investment perspective, February and March 2020 presented an opportunity to invest in equity markets at more favourable valuations. As volatility continued throughout the year, further opportunities presented themselves and we added to equity holdings. Equity markets rallied at the end of 2020 and we are currently experiencing higher valuations again.
It is understandable that the main focus has been on the negative aspects of the pandemic, however, there are many positives to be taken from 2020.
Industries such as travel and hospitality continue to struggle however, other sectors have thrived. The shift in employment and business practices has been extremely rewarding for the tech sector. Many businesses, including retailers have found ways to adapt, some learning new marketing strategies and others making alternative products to meet the sudden demand in PPE equipment, ventilators and cleaning solutions. Transport and delivery services have expanded to meet demand, whilst self isolating has led to more people taking up hobbies such as reading, learning new languages and gaming.
Although the benefits will not be immediately realised and many businesses will fail, other industries and businesses will continue to thrive. There has been consolidation in many sectors as many uncompetitive businesses have been taken over by larger more successful companies. The private sector is driven by entrepreneurship, innovation and adaptability and new companies will be established whilst existing companies adapt to a changing environment and new opportunities. Although the bad news continues to dominate the media coverage, it is worth remembering that there are many companies benefitting and thriving.
Investment Opportunites Await.
As far as our clients are concerned, 2020 provided an opportunity to invest at more favourable valuations. Although the immediate future remains uncertain and volatility will remain in the near term, there will continue to be investment opportunities. We maintain our belief in active, professional fund management and it is during difficult economic conditions that the benefits become obvious. Fund managers may buy and sell holdings within their portfolios, without the restrictions of passive funds. If we continue to select the best managers from the whole of the market and they successfully manage their funds, the future for investors remains as positive as it always has.
I would not want to downplay the serious consequences of the pandemic, however, it is also worth highlighting the considerable investment opportunities that await the long term investor.