With this most volatile of years behind us and an extremely uncertain one stretched out in front, there are big themes and issues facing investors in 2021. Here are our top four:
How covid-19 is impacting the world of investing
In the after-shocks from the coronavirus pandemic will be felt well into 2021, particularly starting as we are, in this new lockdown. The various vaccines that have been granted regulatory approval have been a welcome balm to calm the nerves of the markets, but there are two factors that will affect economies – the speed of access to the vaccine (some countries have negotiated better deals than others) and the willingness of populations to be vaccinated. Only 54% of French say they will and 64% of US citizens. This compares to 87% in India and 85% in China. In fact Asia and China will lead the way out of the coronavirus crisis and we expect Asian markets to outperform.
We also think the rotation from growth to value stocks will persist – typically value investing performs well when growth has been scarce but is recovering and when longer-term interest rates are rising more quickly relative to shorter-term rates. Although investors should beware – lots of sectors and stocks can be viewed as cheap but there will be lots of ‘value traps’ out there. One last point is the continued decline of the US dollar – when times are tough, there is a flight to the US currency, but as economies recover, we expect the dollar to remain under pressure.
How regulation could hit the tech titans in 2021
In the turmoil of 2020, tech has been a clear winner. Tainted as they were from initial market falls, tech stocks recovered and performance has been nothing short of stellar. It’s no coincidence as this was the year we moved online fulltime – working from home, sitting on sofas streaming box sets and e-commerce. Tech underpins everything we do. And it’s reflected in the valuations – the combined market cap of Apple and Microsoft (US $3.6trn) dwarfs that of the entire FTSE All-Share.
Of course, the monopolistic status of many of these tech companies (FAANGs in the West and Tencent, Alibaba and Baidu in the East) means they are not without their problems. They are under intense scrutiny from regulators, eager to track their market dominance and ensure they pay their way (tech giants are adept at shielding profits).
Other problems are their links to the spread of misinformation, child online protection and the proliferation of extremism. This could leave share prices of tech companies vulnerable to regulatory shocks; it would be no surprise to see a pause for breath for the technology sector in 2021. But investing in tech is not just about the big names. There are so many themes to play in the tech sector – such as cloud computing, cyber security, AI and robotics – for investors, the long-term attractions of gaining exposure to these trends remain very much in place for 2021.
The hunt for investment income
It feels like we’ve been talking about ‘the hunt for income’ for years and it continues to be a key issue for investors in 2021. The reason is rock bottom interest rates, which have been in the doldrums for over a decade. It’s bad for savers, for obvious reasons – cash in the bank yields nada, let alone when we allow for inflation. And it’s bad for bond yields – bond prices move in an opposite direction to interest rates. But low interest rates are positive for equity markets, although investors need to be careful about the sectors and stocks they invest in.
Obviously, the value of stocks and shares fluctuates, often significantly, and any dividend stream is not guaranteed and will change (hopefully grow) from year to year. Although dividends have had a tough year, with many companies cutting theirs, the outlook is brighter for 2021. Equities are one of the few assets which currently offer a yield above inflation – the dividend yield from the UK equity market stood at 3.5% in November 2020, far in excess of cash and government bonds and, crucially, above the UK’s 0.5% year on year rise in CPI inflation. Between 1997 and 2019, the dividend per share of the FTSE All-Share rose by an average 6.6% per annum.
The big message is that for investors holding cash and looking to generate income, they might want to look at their asset allocation. With governments dealing with massive amounts of debt following covid-19, interest rates aren’t increasing anytime soon, so investing some savings in equities is probably a good idea to generate income. And there is more than enough choice of equity-based investments to satisfy almost any taste and appetite for risk.
How politics will continue to impact markets
You would think, given the US election is behind us and Brexit almost done, that we will have a more peaceful political scene in 2021. Unfortunately, we don’t think this will be the case. We have continued to see polarisation in political thinking – in the US, the disparity between liberals and populists is being described as the biggest division since the Civil War. It’s not much better in the UK. There is a school of thought (Andy Haldane, the Bank of England’s Chief Economist is one supporter) that post Brexit and with a vaccine on the horizon, Britain could experience the ‘Roaring Twenties’ as public optimism soars once we are let out after multiple lockdowns – can we unite in the common goal of getting the best economic opportunities?
For the US, it would be how they tackle the rising threat of China – experts have predicted China will overtake the US in economic muscle by 2035 – and regardless of Biden or Trump in the driving seat, the US people are squarely behind a tough stance on China. Technology will be the US’s weapon of choice, but military confrontation cannot be ruled out, given China’s incursions into other countries’ territorial waters in its attempt to control the South China Seas. As investors, will we still be able to spread our money across the two regions? Of course, all of these political rumblings have consequences for investors – so we have to be careful how to play them in 2021.
As ever when investing, there are opportunities on the upside and opportunities on the downside. The trick is to use all the information available to you to make an informed decision – and have the flexibility to change direction if you have made the wrong call. 2020 has got the twenties off to an unprecedented start and it will be interesting to see if the early part of this new decade can indeed start to roar.
Michel Perera is chief investment officer at Canaccord Genuity Wealth Management
The top investing tips for 2021
John Westwood of Blacktower Financial Management shares his top tips for investing in 2021.
There is no doubt when it comes to the world of investing there are three words that come to mind: overwhelming, intimidating and scary. The terminology used can be confusing and its difficult to know who you can trust.
We don’t know what this year has in store for us but there is no time like the present to prepare for a number of different scenarios and get you investments in order. This is what you should consider when investing:
1 Spread your investments
Diversification is key, never put all your eggs in one basket, for investing this means never put all your money into just one fund or investment opportunity. Make sure your investments are spread over different sectors and regions, this helps manage your risk.
2 No such thing as a sure bet
Never invest in anything that you are told is a sure bet, with no risk and high returns. You risk losing everything as in the world of investing there is no such thing as a sure bet. If it sounds too good to be true then IT IS.
3 Take extra care if investing with a company
Take care if you invest with a company that cold calls you, or sends you unsolicited emails or brochures via the post. Ask yourself why are they resorting to methods that all regulatory bodies frown on and in the case of cold calling are looking to ban.
4 Liquidity is key
Liquidity is key so that you can react to market changes. Unless you are an experienced investor don’t invest in Structured Notes, as with 99% of them a large percentage or all of your capital is at risk. You could end up with nothing when they mature.
5 Use funds that match your requirements
Use funds that match your own requirements and needs, for example if you need income look at income funds, if you primarily want growth look at accumulation funds. A good investment manager will pick funds to match your requirements.
6 Use an investment advisor with a good reputation
If possible use an investment adviser/firm that has a good track record. Longevity , experience and independence = peace of mind. New companies appear all the time but ask yourself how long are they likely to be around.
7 Have an annual financial health check
Always have an annual financial health check. At least once a year you should receive a valuation of your investment from the Bond/Policy provider either directly or via your Financial Adviser – do NOT accept an email confirming a value.
8 Ask if you don’t understand
Make sure that all investment recommendations are given to you in writing and that you understand them, if you don’t ask for clarification, if you still are unsure just walk away.
Don’t be talked into doing something by a smooth salesperson when your gut instinct says it isn’t for you. You deserve good advice.
Further reading: Investment opportunities post Covid are out there if one looks