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15th January 2021
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Graham BentleyGraham Bentley

Welcome to our first investment commentary of 2021, a year I hope will provide rather more stability than the one we just disposed of.

On reflection, 2020's market behaviour echoes the Crash of 1987 in its speed of descent and subsequent recovery, rather than extended downturns like the financial crisis in 2007 or the dotcom bubble twenty years ago. Generally, UK companies' shares were sharply down by mid-March and naturally this produced the "Billions wiped off pensions" headlines beloved of the more sensationalist tabloids. Cheap money and a collapse in demand hit Banks and Oil companies particularly hard, with falls in share prices of over 40%. Meanwhile travel and leisure companies' share prices were severely punished as lockdowns took their toll.

However, threats to some sectors became opportunities for others as our behaviours adapted to the pandemic. For example, in the UK shopping from home helped shares in Ocado gain almost 80%. While the UK is fairly light on technology companies, the likes of Amazon, Apple, Microsoft and Netflix in the US saw their values rocket through the year. Sales of their Cloud and subscription services surged as we spent more time at home.

Despite the headline fall in the index of the UK's biggest 100 companies by the end of 2020 - almost 12% lower than at the start of the year - smaller companies were actually ahead by almost 7% over the 12 months. Being largely home-market focussed rather than exporters, Brexit concerns and a strengthening pound did not act as a break on their recovery. That said, the outperformance of smaller companies was similarly present across continental Europe and in the US.

Elsewhere, and with not a little irony, China came out of the early and draconian Wuhan lockdown determined to regenerate its economy. The low oil price was a boost in that regard, and the Chinese stock market ended the year ahead by almost 28%. It's near neighbours in the Asian region who similarly managed the COVID crisis successfully saw similar rises, notably South Korea which rose by more than 40% over the year.

As in 1987, most markets (with the notable exception of the UK) ended the year significantly higher than at the start. As might be expected Government debt did well through the March stock market falls, as corporate debt suffered under the threat of companies defaulting on their debt payments, but by the end of the year Global and UK Bond portfolios were typically showing returns of 5-8% over the year.

I'm delighted to report that Avellemy portfolios have remained robust through 2020, producing significantly higher returns than their risk-equivalent peer groups. But that was then, and this is now - so what's in store for 2021?

Every January investment pundits fail to resist the urge to make predictions - aka guesses - about markets' destinations over the coming year. Essentially these consist of little more than extending recent trends while tempering those with uncertainties surrounding important tipping points, e.g. the US Presidential elections and Brexit topped that cautionary list last year. Nevertheless, their predictions are always for market rises rather than falls.

These prophecies are frankly worthless, indeed utterly wrong year in, year out. No one can predict the future, and certainly not account for what Donald Rumsfeld once described as "Unknown unknowns". At the start of 2020 no one saw a global pandemic coming so perhaps that's excusable, but in the depths of March forecasters' consensus was the US market would be down 11% for the year. Being negative when everyone else is seems rational at the time. Suggesting a record rebound would have appeared nonsensical. The announcement of Pfizer and AstraZeneca's vaccines and the boost to share prices didn't result in "Billions wiped ON stock markets" headlines either, sadly, but as we described above, that has indeed been the result. Acting on pundits' predictions in March would have proved bad for one's financial health.

Conversely, it is important to recognise that simply pinning a new calendar to the wall doesn't reset history - the narrative that ran through last year remains in development. Indeed, the arrival of new variants of COVID, and an associated acceleration of cases and hospitalisations in western countries, leaves us in very similar if not more serious straights than those prevailing last April. However, we have the perhaps priceless positive of a vaccine rollout underway. On the political front, Brexit negotiations are concluded and Joe Biden's election to the US Presidency augers well for more economic stimulus and infrastructure development, particularly (as I write) it appears very likely the Democrats will also gain control of the Senate. These developments are positive for US economic, market and hence global recovery, if not 'normality' - whatever that may mean post-pandemic. Meanwhile, the UK market is catching up - as I write this the UK market is up almost 6% in its first 3 days of trading. Low bond yields are not under threat, and there appear no obvious reasons for inflation or interest rates to rise significantly.

Is this a benign forecast? As I said earlier, forecasting market movements carries more than a touch of hubris if not arrogance. One can outline scenarios, weigh probabilities and hazard guesses. But a post-pandemic landscape is ill-defined, even for those of us with decades of experience behind us. For recent investors, seeing the depths of a recession and more than a simple recovery in less than nine months despite three lockdowns must have been a dizzying experience. I think one of John Lennon's posthumous releases echoes that perfectly, "Nobody told me there'd be days like these/Strange days indeed..."

Stay invested, well diversified, and I wish everyone a less stressful year than the last; one at least as prosperous!


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