You don’t have to rely on Boris Johnson or Matt Hancock promising lights at the end of tunnels to boost your morale in these dark times. There is optimism aplenty for stock markets around the world.
Since I last surveyed the opinions of our panel of asset allocation experts three months ago, global equities have checked in with some very strong – in some cases spectacular – performances.
The strong final quarter in a number of markets has been followed by a new year rally as well, and our four-strong panel recognise that three major positive events in recent weeks do much to explain current optimism. We now have a vaccine to fight the pandemic, there is a new president in the White House with control over both Houses of Congress, and finally for the UK we have a Brexit deal.
On Wall Street, the S&P 500 index gained 12.2% in the final quarter, while emerging markets (powered by China and other Asian markets) had their strongest quarterly returns for more than a decade. The MSCI Emerging Markets index rose 20% in the final three months of 2020. Japanese equities forged ahead 20% in the last couple of months of the year.
Even UK shares – for so long the laggard among the major global markets – managed a final quarter bounce back with the FTSE All-Share Index up 12.6% in sterling terms. Although for the year it was down nearly 10%.
Panellists turn more bullish at start of 2021
With varying degrees of enthusiasm our panel offer their reasons to be cheerful.
Rob Burdett at BMO Global Asset Management is perhaps the most bullish although he remains underweight the US (with a score of four) and keeps a high cash score as he thinks recent heady performances may lead to a correction.
“What Covid-19 did was to bring the longest upswing in the economic cycle to a grinding halt and triggered a recession – probably a double-dip recession,” he explains. “That then sets up a new economic cycle for later this year – at least that is what the market is pinning its hopes on.”
His argument is supported by low interest rates, the prospect of a big fiscal stimulus for the US and the willingness of other major governments and central banks to spend money to let the world economy “run hot” to support a post-pandemic recovery.
But downside risks remain. Burdett notes that shipping freight rates have trebled in recent months as shipping shortages have been exposed by recovery in China and elsewhere. Is this a harbinger of increasing inflationary risks?
“Market memories can be quite short and a lot of investors have never seen significant inflation or big interest rate increases,” Burdett warns. “You could only justify current stock-market ratings because bond yields are so low. These are very interesting times and at the very least you need a balanced portfolio.”
His answer is to stay underweight in the US, keep a high cash score, take some profits in emerging markets and corporate bonds – they had an exceptional run in 2020 – while edging up exposure to UK and European equities and keeping high exposure to Japanese equities. He is neutral on government bonds (with a score of five) having edged up his UK bonds score to reflect better prospects for the pound after Brexit.
Interest rates won’t rise until 2024
Keith Wade at Schroders shares some of Burdett’s doubts about high valuations in US equities. But overall he has the most bullish stance on equities of all the panel members. Keeping his US score unchanged at 6 he is boosting exposure in the UK, emerging markets, Europe and Japan in an impressive display of confidence in global recovery. Like Burdett, he is taking profits in corporate bonds.
“Before we get to that recovery we are going to have to go through a difficult period,” he admits. “We are going to have to downgrade our forecasts for European companies, for instance, and maybe this new wave of the pandemic will force us do the same in other regions. But the market itself is looking beyond that and is pretty much underpinned by low interest rates.”
Wade agrees the market’s mood would be seriously upset by any threat to the low interest rate climate, but he does not foresee any rise in interest rates before 2024.
He has kept his exposure to bonds low. “In an era of low interest rates, they are not such an attractive hedge. Finding hedges is one of the challenges facing asset allocators. We are increasing risk levels, so we are using gold and various currency plays as attractive hedges,” says Wade. He keeps his gold score at 7.