The title of my outlook piece in January of last year was “2020 Set to be Another Lively Year for Markets”- little did any of us know just how eventful it would turn out to be! Like a television series with many plot twists and turns, 2020 saw enormous uncertainty and associated volatility in financial markets that came with that. Despite the uncertainty and drama of Covid-19, Brexit and the US election, the year finished strong with global equities rising by 2.3% in euro terms in December and an overall finish year-on-year of 6.8% higher.
The lockdowns and closures of vast sections of the global economy to combat the spread of the disease resulted in a peak to trough fall for global equities of more than 33% in Q1 2020. This was exacerbated in a market that was overvalued, over-owned, with excessive optimism going into the crisis about economic and earnings growth.
There followed a formidable rally as governments and central banks globally acted on a truly enormous scale and much more rapidly than in previous crises. Central banks expanded their balance sheets by more than 10 trillion USD, almost equal to all prior episodes of quantitative easing over the previous 10 years. The Fed, European Central Bank, Bank of England and Band of Japan spent 1.4 billion USD every hour between March and November. Governments implemented massive fiscal spending programs to replace lost income for businesses and consumers, equating to more than 10% of GDP.
The response by monetary authorities prevented what would surely have developed into a financial crisis, whilst the response of governments prevented widespread hardship in the face of the pandemic, preserving consumer purchasing power and ensuring the recovery would be strong once lockdown restrictions were lifted. Towards the end of the year, several vaccines were developed and the roll-out of same means the end of the pandemic is in sight, though the rapid spread of the disease over the last few weeks has led to further severe lockdowns in many countries in the short-term.
Aside from the pandemic, Joe Biden’s victory in the US presidential election should bring to a close an era of volatile politics, whilst the last-minute Brexit deal avoids the chaos that a no-deal would have brought. The season finale and drama of 2020 appears to be behind us for the most part.
Positioning and Outlook
As we enter 2021, we continue to highlight what we have been positioned for since March and continue to be positioned for. As central banks guarded against a financial crisis and subsequent deflationary-bust they have accelerated a technology-led, reflationary boom. Interest rates will remain at or near zero for a long time to come, and governments will be reluctant to curtail fiscal spending. The collapse in the global economy, the huge fiscal boost and extremely loose monetary policy meant we moved from late-cycle to early-cycle in a matter of weeks.
The pandemic, which forced a move to online, has accelerated technology trends that were already in place. The evidence is overwhelmingly abundant: the dollar is breaking down against every major and emerging currency; copper is at an eight-year-high; iron ore has exploded higher; Korean and Japanese technology stocks are accelerating to new highs; the most recent stimulus package agreed in the US ($900bln) has been described by President-elect Biden as only a “down payment” on what’s to come; there aren’t enough trucks in the US to fulfil UPS and Fedex’s customer demand for e-commerce; there aren’t enough semi-conductor parts for Marvell to fulfil its demand for 5G data centres; Ryanair expects to fly 170 million passengers in 2023; Irish mortgage approvals are at a 10-year high; Lloyds in the UK has reintroduced 90% mortgages for first time buyers; the Federal Reserve is permitting bank buybacks again; the CEO of Carnival highlighted that they have two years’ worth of demand from customers with less than 1 year’s usual capacity; S&P companies, which started 2020 with $1.5 trillion of cash on their balance sheets ended the year with $2 trillion; the ISM Index is 5 months into what is usually a 35-month expansionary cycle (according to its CEO).
What happened in 2020 was unique. We effectively went through an entire cycle (market if not economic) in the space of 6-8 weeks – a process that ordinarily would take many months. But the application of and the output from our active investment process remained the same, continuing to deliver for investors.
In a year when equities and bonds returned between 6% and 8%, the Morningstar 5-star-rated Merrion Multi-Asset 30, 50 and 70 funds returned +12.8%, +16.8% and +22.3% respectively, with the Merrion Ethical Fund returning +21.2%. As of the end of December, the Multi-Asset 70 fund is now the number 1 ranked fund in Ireland on the Aon-Hewitt Multi-Asset Fund Survey on both 1-year and 3-year timeframes. The survey includes 40 funds of similar risk and structure which are marketed in Ireland (not Irish funds per se). The Merrion Global Equity Fund returned +21.3% on the year, whilst the Merrion High Alpha Fund returned +28.2%.
The merits of investing in our actively managed multi-asset funds, and in our proven investment process continue to be evident. We will continue to actively manage our risk and our exposures using all available instruments, asset classes and derivative products available to us for everything from short term tactical trades to long term fundamental holdings.
Pearse MacManus is Chief Investment Officer of Merrion Investment Managers.
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Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.