T&T Annual Market Review - 2020
by Thomas Quinn on Jan 29, 2021
7 min read
While embarking on writing my 2020 annual market review I look to my 2019 edition for inspiration and conclude that a copy and paste of the opening paragraph could be sufficient – minus some nods to the topic we all can’t stop talking about, ‘Covid-19’.
As I write this I struggle to recall all the stories, the front-pages, the soundbite headlines that hourly came vibrating through my phone. As each market or political commentator reacted in (usually) faux awe and astonishment to that minute’s news cycle ‘breaking news’
It’s safe to say that 2020 trounced 2019 in ‘breaking news’ as we all encountered our first global pandemic. Unemployment hit 15% (50% more than at the peak than in 2008*), hundreds of thousands lost their lives, businesses closed, and stock markets plummeted (Dow Jones fell 37%). Throw in an impeachment (and later two), ‘Black out Tuesday’ in response to George Floyds death, Australian bush fires, an 11th hour Brexit, the US election, border closures, Boris Johnson in intensive care, calls to overturn a legitimate election and of course ‘Mexit’, Harry and Megan stepping away from royal duties!
If my crystal ball were telling me this on January 1st, 2020, I may have favoured putting my money under the proverbial mattress!
Let’s start with a look at how to markets closed on this extraordinary year.
The US S&P 500 finished +18.4%, MSCI Emerging Markets finished +18.7%, Europe Ex-UK +2.1% and UK FTSE All-Share -9.8%. Global bonds finished +9.2%, Commodities -3.1%, and Global REITs (Real Estate) -10.4%.
Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management, Global Agg: Barclays Global Aggregate. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 December 2020
It was an incredibly strong year for growth stocks globally +34.2% whilst value stocks remained flat, however, Q4 2020 saw a resurgence in value equities +15.9% over the quarter.
With volatility of -34% to +18% for the S&P 500, the investing winners over the year were those long term, globally-minded investors who stuck it out during the Pandemic Panic Sale of 2020.
In the currency markets, GBP picked up 2.4% against the dollar. While the USD fell against all major currencies (Euro, Yen, Pound), it felt most notably against the Aussie Dollar down just over -9% as each country responded differently to the pandemic.
As we’re told of despair and misery around the world in 2020, why and how did the stock market bounce back so quickly? After all, it took over 4 years for the S&P to recover its losses in the last recession, yet it took closer to 4 minutes for this stock market recovery to happen.
In 2008 the main support program for financial institutions came in the way of TARP (Troubled Asset Relief Program) providing financial stimulus totalling $941 billion. This came late, after many tussles between the then Obama administration and the Senate and following the collapse of one of the largest financial institutions, Lehman Brothers.
In 2020, the Federal Reserve acted quickly. First came interest rates cuts in mid-March to 0%, just weeks, rather than months, after the signs were there of an economic shock and businesses were told to close and citizens told to stay at home. $2 trillion also showed up in March plus $1,200 stimulus checks to individuals which were paid out a couple of months later.
It wasn’t just the US who printed more money to lend to businesses, individuals and buy back bonds. The European Central Bank acted in April and by adding each month between £200-$800 billion of Pandemic Emergency relief to the 27 member states. The UK kept their citizens employed through the furlough scheme paying for the wages of employees who would have been otherwise laid off. Similar efforts in Japan, South Africa, Canada all came swiftly and propped up business, economies, and the resulting stock markets.
Money has been swiftly thrown at the problem in 2020. Businesses struggling were given money in the form of grants, while others have been able to borrow the necessary funds. Consumer confidence never fell to 2008 levels and the savings rate (the amount people are saving each month from their salaries) has risen from 7.9% in 2019 to 17.2% in 2020.
What has made this stimulus and lending possible is the relative strength of the banking system this time around. In 2008 the source of the problem was the financial underpinning of the US economy. The system was overwhelmed and banks were on the brink of collapse. As a result of this was a better regulated financial system today and the banks could be used as part of the solution, rather than the problem.
It may be too soon for calling this a job well done, but with a sound financial system and an almost proactive global central bank stimulus effort – the 2008 mistakes were this time learnt.
A deal between the UK and EU has occurred after 40 years together and 4 challenging years of pushed deadlines and posturing. The deal has gone down in a rather muted finale which I think we can take as a relative success.
So what’s set to change:
- Travel –UK citizens, armed with their blue passports, must have 6 months left on their passport in order to travel. From 2023 the EU will require an ESTA style travel authorisation for all non-EU travellers and immigration border queues are likely from this point.
- Visits of 90 days plus may require a visa.
- There are limits on bringing alcohol across from the EU to the UK and limits of £390 on goods purchased.
- Driving into the UK and the EU will require a green card from your insurer confirming you have the insurance cover.
- EU health insurance cards are gone. However, the UK is expected to issue their own version which will cover you when abroad.
- Brits will now need a visa to work in the EU. Student visas will also now be required.
- Free trade remains but the bureaucracy has increased.
- A ‘level playfield’ must be adhered to by both parties on labour protections, climate change provisions, environmental protections and tax transparency all to ensure fair competition on trade between the two nations.
What did happen to fishing rights? There is now a 5 and half year transition period where EU vessels can maintain fishing in UK waters, but this slowly tails off until both sides then agree a long term solution.
As the dust still settles after the 2,000-page agreement has been dropped in Westminster, the consensus, as we read the tea leaves of the foreign exchange markets and the FTSE, is positive. Yes, more paperwork, yes there are unknowns and they’ll be some challenging and expensive legalities in the coming months and years, but the UK can press forward in creating its new identity on the global stage.
With 2020 as evidence it’s impossible to predict the future, let’s take a look at what we could expect over the year ahead:
- GBP may rally with some bullish analysts calling for $1.44.
- Optimism builds as vaccines are rolled out across the world.
- Year on year earnings to be tremendous – coming from a depressed 2020 data set.
- Borrowing to continue giving lifeblood to businesses and the markets.
- The stock market will correct (falling by 10% or more) –historically this occurs every 12 months.
- News will perpetuate negative headlines leading to unnecessary investor panic and bad financial advice.
- We’ll all conclude again that we’re living in a crazy time.
As a company, we’re optimistic as we go into a new year. With interest rates so low, we believe equities are the asset class to hold in the main because of their long-term capital growth and growing dividend appreciation.
We, therefore, tune out “volatility.” We act; we do not react. This was the most effective approach to the vicissitudes of 2020. I believe it always will be.
It’s been a pleasure working with you this year, and we’re looking forward to many more years to come.
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