On one hand, the roll-out of a vaccine and a new US president are helping to boost investor sentiment. On the other, a new strain of the virus, surging infection rates, and further lockdowns are weighing heavily on already struggling companies. We ask Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, for his views on the challenges and opportunities ahead.
What are the biggest challenges for investors as we enter the New Year?
In my last outlook, I wrote about the reasons for economic optimism for the year ahead given the arrival of a vaccine. And, I noted caution in the short term, as we navigate the northern hemisphere winter and the virus risks that this entails. Unfortunately, recent weeks have shown the merit of this caution, as infections rise and as we hear of new variants of the virus. I suspect that this new wave of the virus will test investors' nerves - and so it's a time to keep ours.
From a UK perspective, 2021 will provide clarity on what Brexit actually looks like. At the time of writing, a deal had just been announced. The detail will be pored over in the days ahead - and the devil will, I suspect, be in this detail. Unfortunately, it seems certain to confirm that the UK wasn't able to 'have our cake' and 'eat it'. The choices made will, however, be important ones. They will shape the UK economy, and to a lesser extent European Union economies, for decades to come.
It's important to note that there were not significant differences between a 'no deal', therefore trading on World Trade Organisation (WTO) terms, and the limited free trade agreement that the UK sought. The significant decision not to be part of the European single market and the customs union had already been made. Investors in UK stocks and shares, UK bonds and sterling have already factored this into the values they're buying and selling at. This means that much of the expected poorer UK economic outlook relative to the status quo, driven by Brexit, is already reflected in these prices.
Which signs are you most optimistic about?
Firstly, and perhaps most obviously, we have the good news of the vaccine, its apparent efficacy and its already fairly swift roll-out. This allows companies and investors to predict more confidently a relatively 'normal' world in the second half of 2021 and beyond, and a global economy getting back into gear again.
Joe Biden's new US administration is also likely to be more predictable and more respectful of the institutions and traditions of the US. This feels an important step forward for the world's largest economy.
Finally, I'm struck by the flexibility, ingenuity, and resilience of much of the corporate sector over the last year. Company profits have proved much more robust than many investors feared. Companies have managed costs and flexed their business models to cope with the most challenging market environment that most will have had to face. Worth remembering as we (hopefully) head into slightly better times.
What impact could the new US president's administration have on companies and markets?
At the time of writing, we've still not seen the final shape of the US Congress, with the Georgia Senate run-off due on 5 January. The result of this election will impact the ability of the Biden White House to drive its policy agenda.
Domestically, the new administration is likely to have a greater focus on the environmental agenda - although I feel that this agenda is one that has a momentum of its own and is one that politicians are arguably following rather than leading.
Elsewhere, there's been much discussion of a more interventionist attitude to the technology sector. This is easier said than done, allied with the fact that the big technology companies are US success stories and generally popular with their customers. However, I suspect this will worry investors from time to time in the year ahead.
Internationally, we're likely to see a more predictable foreign policy and one that is perhaps less 'Twitter-led'. This said, the underlying drivers of the conflict between the US and China - one of the most important areas of foreign policy - have not gone away. Both Republicans and Democrats are concerned about this precarious and critical area of global politics. Disagreements between the US and China are therefore likely to influence markets again in the year ahead.
Which industries and sectors are likely to struggle, or do well?
The announcement of the vaccine in late November caused a very interesting end to 2020 in markets. The optimism engendered by the vaccine, and expectations for economic growth to bounce back because of it, caused a change in which industries and sectors were doing well and which were losing some steam. The 'darlings' of the last decade, mainly technology stocks, were overtaken by some of the laggards, such as banks and energy stocks. The expectation of a vaccine-led pick-up in economic growth over the next couple of years may well allow some of these trends to continue.
However, care is merited. Many of the issues that have impacted these newly attractive areas of the market remain; more goods being produced or services being offered than are being demanded, increasing regulation, and the green agenda - to name but a few. Careful analysis of each individual company (no matter which industry it sits in) is, as ever, key. As is ensuring your investments are spread across a mix of different industries and geographical locations - diversification.
Is anything in economies and investor behaviour surprising you?
I've been doing this job for 30 years and so little surprises me now. I might therefore turn this question around and note what doesn't surprise me!
But it's certainly interesting that there's almost universal enthusiasm for company shares at the moment. And it's surprising to an extent, given that the US market is some 60% off its March lows - a time when there was of course much less enthusiasm. A lesson (again) for taking a long-term view in a diversified range of investments.
Do you have any New Year resolutions - for investing and personally?
When it comes to investing, it's to keep doing our investment 'homework'. Have a clear 'true north' as to the assets we like and what we think these are worth.
I suspect that the year ahead will at times tempt investors to panic, and at other times to exuberance. But knowing in meticulous detail the quality of the companies we invest in - their balance sheets, production processes, supply chains, leadership teams, and how they manage environmental, social and governance (ESG) risks and opportunities - and having a strong view as to their worth, will keep us on a straight path.
When it comes to a personal resolution, it's to read more (non-investment) books! I've just finished Shuggie Bain by Douglas Stuart; a difficult and heart-breaking story. I hope to read more great literature like it in the year ahead.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your clients' investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments' understanding in December 2020.