Looking back on 2020
2020 served as a reminder that ‘outlook’ commentaries tend to have a very short shelf life. We entered 2020 expecting the economic cycle to pick up slightly and while there were some concerns over valuation levels, supportive monetary policy and some prospects for fiscal easing left us with a reasonably constructive view on the prospects for the year.
Covid-19 changed everything, with financial markets reacting violently as the global economy was shut down as politicians and scientists tried to get to grips with a pandemic the scale of which has never been seen before in modern times. The pandemic remains with us to this day and will likely weigh on economic activity well into 2021 even as the very welcome vaccines are rolled out across the globe.
Looking at financial markets, the impact of the pandemic is hard to see in some places. With the rally in equities since the lows of late March, many indices ended up with positive returns for the year. Indeed, at certain points later in the year, there were some signs of what has previously been described as ‘irrational exuberance’ in some of the frothier areas of equity markets. Government bonds unsurprisingly saw plenty of support throughout the year and yields moved even lower as investors desire for safety at any price took hold. While government bond yields rose slightly over the summer as risk appetite improved, central bank asset purchases kept yields close to record lows. Investment grade bonds and high yield credit recovered well over the year from the steep falls that mirrored those seen in equity markets.
The news of the successful vaccine trials turbocharged the market recovery from November, and indeed supported a long awaited period of outperformance from value stocks and other undervalued parts of the market as cyclical stocks rallied strongly.
The key catalysts for the market recovery earlier in the year were the actions of the central banks, with liquidity injections and asset purchase schemes introduced at levels that eclipsed anything seen during the Global Financial Crisis. The central bank support helped to underpin the financial system at a time of significant stress, and the excess liquidity in the system provided significant support for risk assets. Equally, fiscal support has so far helped prevent many companies from defaulting and most consumers from losing their jobs or income. The recession of 2020 was more of an economic shock than a ‘normal’ recession and while governments and central banks have done a huge amount to try and soften the impact, the economic scarring will be felt for some time to come, not least given that 2021 begins with many countries in various states of lockdown, with potentially more aggressive measures yet to come.
2020 is not a year we will look back on with a great deal of pleasure or pride. It was a very sobering year both in terms of the human and social impact of the pandemic but also on a professional level. This felt very different from the global financial crisis, where there were plenty of warning signs over an extended period. The sudden economic stop and subsequent financial market crash was hard to position for, and the subsequent stock market recovery initially appeared to be built on very weak foundations given the economic damage that was taking place. As ever, the need to be pragmatic and adapt saw us adding risk to portfolios as we became more confident that the worst of the economic disruption had passed, and this conviction was enhanced as news of a successful vaccine emerged.