Financial markets have been on a rollercoaster over the past year. There was a sharp drop in March as countries locked down and then a swift upswing followed, led by technology shares. Even unloved companies, particularly banks and energy firms, have rebounded lately, thanks to good news about vaccines.
In our first article, we explore what’s likely to happen as vaccines are gradually rolled out and the global economy recovers in 2021. Many investors had shifted their portfolios away from stocks that were seen as winners of the pandemic into cheaper ‘value’ stocks that have been hard hit by lockdowns. Although we see limits to how much further this rotation can continue, we do believe a less cautious stance is now justified.
While some developed countries have ordered more than enough vaccines to inoculate their entire populations, many emerging markets have been pushed to the back of the queue. On page 5, we look at how developing nations are likely to take longer to recover from the pandemic as a result.
With bond yields extremely low, we explore what the other options are for adding the right degree of safety and diversification to portfolios on page 6. Rather than just focusing on returns, we believe portfolios should also be built with risk protection in mind. The framework we use when assessing risk allows us to better understand the potential for losses at the overall portfolio level.
The US dollar looks like it may be flying too high against most major currencies on a longer-term basis. On page 8, we explore whether recent weakness in the currency could continue over the next few months, and what the implications might be for global investors based in the UK.
In our final article on page 9, we examine how recent events have highlighted the complexity of making decisions about active versus passive investing. Looking over the past 10 years, the FTSE 250 index of mid-sized companies has outperformed the FTSE 100 large-cap index, the broader FTSE All Share index and an index of active investors. But it’s also been the most volatile and those returns don’t look as good when adjusted for risk. This highlights that a careful, measured approach is needed, whether investing actively or passively.
We hope you enjoy this edition of InvestmentInsights.
Julian Chillingworth Chief Investment Officer