Investment Bulletin:
December 2020

This month:

Several global megatrends are driving wealth managers’ views on the equity markets, with a greener, more digital future the over-arching theme. Read on as experts from our panel unpick which markets, sectors, stocks are likely to be the winners in 2021.

Expert investment views:

Positioning portfolios for a greatly changed future is highlighted as a route to outsized returns

Investors are urged to consider opportunities for “recovery returns” in less popular equity markets

Big 2021 ESG investment themes are identified, along with funds that offer access

Caution is sounded on some ESG stocks running hot, however, and a subtler approach advocated instead

Featuring this month’s experts:

1. Why 2021 will be a year of renewal

Insights from:

Following an unprecedented year, we expect that economic output and corporate earnings will rebound to pre-pandemic levels in 2021, as companies benefit from increased consumer and business spending, facilitated by vaccination programmes. However, rather than a simple return to normal, we expect this rebound to be coupled with a rapid acceleration into a transformed future.

As a result of this, investors need to be positioned both in cyclical opportunities in the sectors most negatively affected by the pandemic, and in more future-proofed opportunities.

Over the next decade, investors face a significantly evolved world: one that is more indebted, more unequal, and more local than before. This will mean lower returns in traditional assets as a whole.

We think that the “Next Big Thing” will materialise within companies that are using technology to disrupt other sectors, and see particular opportunity in fintech, healthtech and 5G

But investors can earn potentially outsized returns by positioning themselves for a more environmentally conscious and digital future.

We think that the “Next Big Thing” will materialise within companies that are using technology to disrupt other sectors, and see particular opportunity in fintech, healthtech and 5G.

And with the EU, Japan, and China all pledging to be carbon neutral by the middle of the century, those “greentech” companies which are positioned to help economies transition to net zero emissions more easily should see good returns.

In fixed income, we expect the “hunt for yield” to continue, with central banks unlikely to increase interest rates until output gaps have closed, a process likely to take years rather than months. In this context we like yield opportunities in emerging markets and Asia

Finally, in currencies, the US dollar index has dropped nearly 10% from its highs in March 2020, but we expect that it will weaken further in 2021. A recovering global economy will reduce safe haven demand for the dollar, and real US interest rates are now lower than those in the eurozone. Considering this, we believe that investors should continue to diversify across G10 currencies or into select emerging market currencies – like the Indian rupee and Indonesian rupiah.

Kiran Ganesh

Multi Asset Strategist at UBS Global Wealth Management

2. Precise pockets of value are there to be sought

Insights from:

To say there has been a disconnect between asset markets and the economy this year would be a major understatement. If we had said a year ago that in twelve months’ time we would be suffering a global pandemic, had experienced the worst economic shock since the end of the Second World War and that many asset markets would be at record high levels and trading at valuations rarely seen before in history, you would have thought we were mad. This is making our role as asset allocators and investment selectors particularly challenging. Our response is to cast our net as wide as possible and to eke out precise pockets of value from global asset markets.

Our current strategy is to focus in on specific assets that still offer reasonable growth potential at justifiable valuations, with industries like healthcare, elements of the technology sector and specific plays on infrastructure and “green” technology all favoured within our portfolios.

We also have certain investments in the less popular parts of global equity markets, including the UK and Japan, where valuations are simply too cheap and the opportunity for recovery returns is on offer

We also have certain investments in the less popular parts of global equity markets, including the UK and Japan, where valuations are simply too cheap and the opportunity for recovery returns is on offer. Assuming that there is some sensible conclusion to the never-ending Brexit saga in the coming months, which is our expectation even if there is a delay until early next year, then UK equities could continue their recent pattern of improved performance.

The equity investments that we own across our portfolios have been blended with a range of fixed interest investments, including those that we own for “defensive” returns and others that are priced appropriately for the challenging economic situation we are dealing with. We continue to be able to source attractive fixed interest investments where we are being suitably compensated for the risk that we are taking, and that gives us confidence that we will be able to achieve our clients’ ambitions in the coming years.

Thomas Becket - Psigma Investment Management

Thomas Becket

Chief Investment Officer at Punter Southall Wealth

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Top Tip

A greener, more digital future sets the scene for 2021, yet investors have to be clever in executing views on the biggest investment themes of our time. Why not speak free of charge to an expert to discover how you can position to better weather any storms ahead?
Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. The big five ESG themes for 2021 and the funds to capture them

Insights from:

What a year that was. You can say what you like about COVID-19, but one silver lining is that it shone a light on environmental, social and governance (ESG) investing. This was for a few reasons – ESG funds tend to be underweight airlines, oil and “dirty” cyclicals and overweight “quality” companies. And ESG investing attracts some talented fund managers. 

Whatever the reason, if there were any ESG investing detractors at the start of 2020, there are far less now. In the context of the coronavirus crisis and – hopefully – a more positive, vaccine-fuelled outlook for 2021, what might be the big ESG trends for 2021?

Cybersecurity is one. As offices turned their lights off and went home and more of our lives moved online, the risks associated with online shopping, banking and working soared. So, cybersecurity is becoming increasingly important to businesses and individuals. Exchange-Traded Funds like Rize and L&G capture this theme. 

Cloud is another. As our digital footprints escalate and we rack up reams of data, we need somewhere to store it. And somewhere to access applications and other software that we might want to license. The cloud is where we stream our favourite Netflix box-sets from or where our kids play Fortnite. A way to access this is through the First Trust Cloud Computing ETF, or through a fund such as Polar Capital Technology Trust. 

During lockdown, as skies cleared, roads emptied and the air we breathe became cleaner, governments pledged to create a carbon-free world. This has driven down costs around wind and solar power, so we think we will see a bigger focus on sustainability

Clean energy is another. During lockdown, as skies cleared, roads emptied and the air we breathe became cleaner, governments pledged to create a carbon-free world. This has driven down costs around wind and solar power, so we think we will see a bigger focus on sustainability. The iShares Global Clean Energy ETF and Lyxor New Energy ETF focus on this theme. 

Electric vehicles is another theme, as is the biotechnology sector. And developments in both these markets will ratchet in coming years. 

2020 was the year of a lot of things. But it was undoubtedly the year ESG became part of the establishment. 

Cannacord Genuity Wealth Management - Patrick Thomas

Patrick Thomas

Head of ESG Investing at Canaccord Genuity Wealth Management

4. Are investors paying too much for ESG stocks?

Insights from:

Investors have moved aggressively away from fossil fuel stocks and into the renewable sector this year, but does switching to obvious low-carbon alternatives present a different threat – valuation risk?

Wind farm developer Ørsted, for example, is now valued at over 50 times earnings, relative to Shell on less than 10 times. That is pricing in an awful lot of growth when we expect increased competition from the big oil companies transitioning to renewable energy and potentially driving down returns.

With ESG and wealth preservation both at the core of our investment strategy, we are looking for other ways clients can benefit from the transition to a low-carbon world in 2021.

Investors must not assume that obviously green industries are the only way to capitalise on the drive to transition to a low-carbon world

We take the classic picks and shovels approach. Rather than take the call as to whether solar or wind will win, or whether to back BP or Ørsted, we take the view that, whatever happens, you need network grids that can deal with variable demand on electricity, as well as variable supply. So, we have been looking closely at utility companies.

Similarly with transport – responsible for around 25% of CO2. We do not have to bet on VW or Tesla. All these cars are going to have more semiconductors on them, because they are having to deal with electrification of the drive train, so we can own companies in that space instead.

Investors must not assume that obviously green industries are the only way to capitalise on the drive to transition to a low-carbon world.

James Hambro & Partners - Mark Leach

Mark Leach

Partner at James Hambro & Partners

Important information

The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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