Investors rethink the role of securities, technology and ESG after a chaotic year

Photographer: Michael Nagle / Bloomberg

This was a year like no other.

Hammered by a unprecedented health crisis, global stocks fell in a bear market in record speed, and then reached new highs thanks to a flood of money from the central bank. Bond yields plummeted to unknown lows and the world reserve currency rose to historic levels, only to then retreat to its weakest level in more than two years, as 2020 comes to an end.

Global asset allocators, from BlackRock Inc. to JPMorgan Asset Management, outlined their goals for the volatile year investors. Here are some of his thoughts:

Rethinking the role of securities in portfolios

The huge stimulus distributed by global policymakers when markets stopped in March led to a collapse in what has long been a negative correlation between stocks and bonds. The 10-year US Treasury yield increased from 0.3% to 1% in one week and, at the same time, the stock markets continued to fall.

Now, with investors facing lower rates for longer, even as growth accelerates, doubts arise as to whether government bonds from developed markets can continue to offer protection and diversification, as well as satiate investors seeking income gains. There is also a debate on the traditional investment policy of placing 60% of resources in stocks and 40% in bonds, although the strategy has proved resilient throughout the year.

“We expect a more active fiscal stimulus than any other modern period in history in the next economic cycle, as monetary and fiscal policies align,” said Peter Malone, portfolio manager at JPMorgan Asset’s multi-asset solutions team in London. “The future returns on a simple, static stock portfolio are likely to be limited.”

Some Wall Street giants recommend investors a pro-risk stance to adapt to changes in the securities’ role. Among them, the BlackRock Investment Institute advised investors to turn to high-yield stocks and bonds, according to a note published in early December.

‘Don’t Fight the Fed’

Few would have expected the rapid turnaround in the markets we saw in 2020. With the spread of Covid-19, the S&P 500 index plummeted 30% in just four weeks at the beginning of the year, a drop much faster than the average of a year and a half that it had taken to hit bottom in previous bear markets.

Then, as governments and central banks reinforced economies with liquidity, stock prices rebounded at an equally surprising pace. In about two weeks, the US benchmark rose 20% from the March 23 low.

“Typically, you have more time to position your portfolio in a correction,” said Mahesh Patil, co-director of investments at Aditya Birla Sun Life AMC Ltd, based in Mumbai. With markets moving so fast, someone in cash “would have been caught napping in this rally and it would have been difficult to catch up. “

Being a little contradictory helps, Patil said, adding that it is better for investors not to accept a very big option of running out of money. They should also focus on a bottom-up portfolio so that they can go through bullish and bearish cycles, he said.

SooHai Lim, head of Asia Equities ex-China at Barings, said the market’s rapid recovery proved the old saying “Don’t fight the Fed”.

That said, some fund managers have warned that investors should not accept quick support from central banks as collateral.

“It was a coin toss that it came out of and if they went into action early enough,” said John Roe, head of multi-asset funds from Legal & General Investment Management in London. “The downside may have been unprecedented.”

Teflon Tech

The dizzying rise in technology stocks this year has given investors a unique opportunity. Anyone who has missed this topic, who has benefited greatly from the stay-at-home and digitalization trends in the pandemic, would likely find that their portfolios lag behind benchmarks. The top ten companies in the United States that contributed most to earnings for this year’s S&P 500 Index are all technology-related stocks, from cloud computing pioneer Amazon.com Inc to chip maker NVIDIA Corp.

It’s all technology

These actions were the ones that most contributed to the gains of the S&P 500 this year

Bloomberg

Even with a short pause in November, when positive results from testing a Covid-19 vaccine spurred a turnaround for outdated cyclical holdings, the technology ended up as the best performing sector in Asia and Europe. Adherents of the value strategy saw multiple false starts throughout the year, as investors bet that the stock group, defined by the low price and composed mostly of names sensitive to economic cycles, would finally have its day. They were disappointed.

“Never underestimate the impact of technology,” said Alan Wang, portfolio manager at Principal Global Investors in Hong Kong. Thanks to the costs of cheap loans, “many new technologies have been reevaluated and this (pandemic) has just created a great opportunity for them to reinvent our lives”.

Innovative stocks are now being valued based on intangible factors, such as goodwill and intellectual property, rather than traditional methods, such as the price / earnings ratio, Wang said, adding that investors should adopt such valuation strategies.

Money is king for companies

The pandemic and the speed with which it blurred the markets showed investors that they should stay with companies with solid balance sheets and capable of taking advantage of the waves of uncertain times.

“The resilience of stocks in a year like this helps to prove their worth and justify their higher valuation multiples in a low-interest world,” said Tony DeSpirito, director of U.S. fundamental assets investments at BlackRock.

2020 reaffirmed two important lessons DeSpirito Learned over the years: investors must conduct stress tests on companies to see if the profits and balance sheets of these companies are strong enough to survive recessions during normal times; and they must diversify investment risks and also increase sources of alpha potential.

Be aware of collateral damage