As the news of vaccine developments unfolded, we made changes to our clients’ managed investment portfolios to position them for market movements over the coming months, as Rebecca Cretney explains.

Throughout the pandemic, and more so in recent weeks, the rhetoric of many market pundits has been focused on a significant fall in equity values in the coming weeks. In fact, Google Trends – which tracks the use of search terms on its platform – saw the phrase “stock market bubble” recently reach its highest level since 2004.

It’s easy to see why, given the MSCI All Country World Index rose 18% in a year littered with bad economic numbers. How can we be optimistic when headlines scream that the UK suffered its worst drop in economic activity for 300 years? The picture in the US is better, but the US GDP number was down -2.5%, despite growth in Q3 and Q4 of 33% and 4% respectively.

And while the percentages of populations vaccinated are multiplying in the UK, US, UAE and Israel, the Eurozone is only at around 5.5% and many more countries lag significantly, e.g. the latest number for China is 2.8%, while Japan only started its inoculation programme on 17 February. As such, at this stage, it is really only the US that looks likely to lead the global economy back to health.

The promise of life returning to normal is, however, gathering pace and the March/April 2020 discussions around the ‘shape’ of the recovery are restarting. While there was a plethora of Vs, Us, Ws and Ls, at the time, few advocated that we would see a K, which is what ultimately happened.

While overall 2020 globally listed company earnings came in around -15%, we know some sectors, such as communication services and information technology, benefited from the COVID-19 backdrop and surged. Other sectors headed even deeper into negative territory, and it is expected that some 20% of businesses may never reopen their doors. This was a natural result of spending habits changing across the world’s leading economies. The US provides an excellent example, as shown in the table below.

Estimated gap in real Q4 2020 US personal consumption expenditure
Overall -4.9
  Goods 3.5
    Durable goods 6.7
      Motor vehicles and parts 6.9
      Furnishings and durable household equipment 4.8
      Recreational goods and vehicles 8.6
    Non-durable goods 1.8
      Clothing and footwear -4.2
      Car fuel and other energy goods -9.5
  Services -8.7
  Household consumption of services -9.8
      Healthcare -7.0
      Transportation services -26.4
      Recreation services -34.5
      Food services and accommodation -22.8

Source: US Bureau of Economic Activity and BCA Research

But what will the letter be for 2021?

In a poll among analysts, economists and fund managers on 15 February1, opinions were tied, with around 35% opting either for a U or a W. We believe, however, it is the U that makes sense, as those economies that will be able to move beyond lockdowns and restrictions could see economic activity pick up quickly. An example is the UK where, despite businesses struggling with the new trade rules with the EU, the Bank of England’s chief economist, on Friday 12 February, likened the economy to a “coiled spring” given the pent-up financial energy held back by the pandemic. In the US, the current stimulus package on the table will be followed by an infrastructure spending package.

This, in turn, could prompt even higher values in equity markets, not least as markets beyond the US are trading at far more reasonable values. While the NASDAQ is up 83% over three years, Emerging Markets are ‘only’ up 12% over the same period – hardly bubble territory. In 2020, while the NASDAQ was up 51%, the Eurozone was down about -5%.

Meanwhile, there are possible lessons from history as the NASDAQ 100 was up 285% in the three years to March 2000. The broader S&P 500 between 1997 and 2000 saw growth of 93%. These numbers eclipse the last three-year increases of 83% and 36%. If current valuations climb to these previous highs, these headline indices could rise by another 50% or more2.

The equity risk premium1 (the differential between the returns you can expect from equities as opposed to a ‘risk free rate’) remains elevated, but it is at a time when the supply of equities is a trickle. The number of new companies being listed is at an all-time low, while demand, given the lack of alternatives for investors to enjoy a positive return, continues to grow.

This growth is not just among existing investors. Since the start of 2020, retail trading as a share of overall market activity is estimated to have nearly doubled from between 15% and 18% to over 30%3. Yes, the recent spike in Reddit and Robinhood has subsided, but it has piqued a broader interest in investing among different demographics – a trend that other online trading platforms are confirming.


For more seasoned investors, their experience of historical equity sell-offs is only likely to ensure a continued focus on equities. Previously, there was a very real and viable alternative in bonds, with UK bonds yielding 5%-6%. Now, these same investments are giving investors 0% returns. If we measure returns against bonds, even the NASDAQ 100 looks cheap.

Central banks are also very unlikely to raise rates anytime soon. Not only would these cripple their governments, who hold record levels of debt, but they could also cause complications for their asset buying programmes. As such, monetary policy should continue to be accommodative.

Last, but not least, everyone wants equity prices to go up. From Biden to the Federal Reserve, from investors to traders, the bandwagon continues its journey and it would likely need a few serious knocks to see it career into a ditch.

Our view, therefore, is to remain cautiously positive on equities on a 12-month view. And while we have redeployed some capital from investments that did phenomenally well in 2020 to those we expect will recover ground in 2021, we have not dramatically reduced our equity exposure. As one commentator4 put it, “We’ve stopped dancing, we are standing closer to the door, but we haven’t left the party yet”.

Investing never feels comfortable as it necessitates risk, especially at a time when markets appear ‘frothy’, i.e. where investors may be ignoring the fundamentals and bidding up asset prices. However, our research showed that 80% of the time an investment in equities is up 12 months later, even if you invested at a new market high. And while past performance is no guide to future returns, you can remain reassured that our long-term approach to investments is grounded in research, risk assessments and a disciplined approach to buying and selling, based on fundamentals and not on search engine trends.