19 Jan Good Riddance to 2020!
I can’t think of too many people who will look back fondly on the past year. A global pandemic, lockdowns, confinement, travel bans, economic slowdown, job losses, social unrest, political uncertainty, were just some of the key lowlights of the year. Conversely, the highlights were few and far between. First and foremost, there was the global effort to quickly develop effective vaccines and the resulting first doses being administered in December, giving hope for a return to some sort of normal life, in the not too distant future. Secondly, we witnessed the incredible resilience of financial markets in the face of unprecedented circumstances.
Let’s start with equity markets. After a quick and painful reaction to the onset of the pandemic in March, global stocks quickly recovered and have been on an almost steady uptrend ever since, with the S&P 500 for one reaching new all-time highs. The year was capped off by a very strong quarter, with the MSCI World index gaining 14.0% in the final three months (Table 1). October was a difficult month, when markets backed up in reaction to a resurgence of Covid cases in Europe and increased restrictions. However, sentiment quickly turned around in November, with the announcement of effective vaccines by Pfizer, AstraZeneca and Moderna, and in December, when the first doses were administered.
There was light at the end of the tunnel, hope for a return to normality, and as a result, a brighter outlook for risk assets. This optimism trumped (pun intended) other concerns, such as the US presidential elections which came and went, not without some issues, but with relatively little disruption to the markets. In the end, global equity markets finished 2020 with a better than expected 15.9% return, driven mostly by US stocks. Meanwhile, European markets could not fully recover from the losses in Q1 and finished the year in negative territory. As for the Canadian market, it finally pulled itself together in the final quarter to conclude the year with a positive performance. The financial sector, which accounts for 30% of the Canadian index, and the energy sector were the main culprits to a relatively disappointing year.
Table 1 – Equities
|Performance % at December 31, 2020||Q4||YTD||Currency|
|US – S&P 500||12.15 %||18.40 %||USD|
|MSCI Europe||10.80 %||-3.32 %||EUR|
|Canada – S&P/TSX||8.97 %||5.60 %||CAD|
|MSCI Emerging Markets||19.70 %||18.31 %||USD|
|MSCI World||13.96 %||15.90 %||USD|
This last quarter, global markets were led by names in more cyclical sectors, a continuation of the recovery play witnessed in Q3. As such, the energy, financials, consumer discretionary and materials sectors led the way, while the more defensive consumer staples and healthcare names trailed. For the year, the big winners remained the technology, consumer discretionary and communication service sectors. These sectors were driven by the likes of Facebook, Amazon, Netflix, Microsoft, Apple and Alphabet. Despite their strong rebound in the latter part of the year, the energy and financials sectors finished 2020 as the two worst performers, both with negative returns.
On the fixed income side, a more optimistic outlook meant a lesser need for the safe-haven assets, as such, US Government bonds fell during the quarter (Table 2). Meanwhile, the high yield sector led the way in both the US and Europe, as the spreads, or the interest rate premium over government rates, continued to contract during the quarter, an indication of higher demand for these riskier issues, as concerns over defaults receded. The corporate sector also benefitted from narrowing spreads so as to outperform government bonds.
As a whole, global bonds performed well in the final three months of the year, with a return of 3.3% for the Barclays Global Aggregate index, pushing the performance for the year to 9.2%. However, 2020 will be remembered for the tremendous support provided by central banks globally via bond purchase programs and loose monetary policies. Today, 90% of all central banks have their target policy rate at an all-time low.
Table 2 – Bonds
|Performance % at December 31, 2020||Q4||YTD||Currency|
|Barclays Global Agg||3.28 %||9.20 %||USD|
|Barclays US Agg||0.67 %||7.51 %||USD|
|Barclays US Government||-0.79 %||7.94 %||USD|
|Barclays US Corporates||3.05 %||9.89 %||USD|
|BofA US High Yield||6.48 %||6.17 %||USD|
|Barclays EUR Agg||1.26 %||4.05 %||EUR|
|Markit EUR Sovereigns||1.21 %||5.01 %||EUR|
|Markit EUR Corporates||1.98 %||2.73 %||EUR|
|Barclays EUR High Yield||5.34 %||1.76 %||EUR|
|Ishares Core Canadian Universe Bonds||0.64 %||8.57 %||CAD|
Note that the USD returns for the Global Aggregate index above were helped by the weakness of the US dollar this year since non-US bonds account for approximately 65% of the index composition.
Speaking of the USD, the greenback hit yearly highs of US$ 1.07 to the Euro and C$ 1.47 at the worst of the market shock in March, as investors rushed into traditional safe-haven dollar assets. Since then, including in the fourth quarter, the USD has been freefalling in sync with the return to a more risk-on mood by investors (Table 3).
Table 3 – Currencies
|Performance % at December 31, 2020||F/X rate||Q4||YTD|
|EUR/USD||1.2236||4.3 %||9.0 %|
|EUR/CHF||1.0816||0.4 %||– 0.5 %|
|EUR/GBP||0.8951||-1.3 %||5.6 %|
|GBP/USD||1.3669||5.7 %||3.2 %|
|USD/CAD||1.2740||-4.6 %||-1.8 %|
|USD/JPY||103.25||-2.2 %||-5.0 %|
So, we say goodbye to 2020 and everything good (some) and bad (mostly) that came with it. Good riddance, bring on 2021. But what should we expect for this year and the future? We can all try to guess as to when things, be it our everyday life or the economy, will get back to some sort of normality. Frankly, your guess is as good as mine.
From an investment standpoint, we prefer to take a longer view, we do not try to speculate on the next quarter or year. We build our clients’ portfolios with a long-term perspective in mind, we focus on establishing the proper asset allocation and on selecting the best managers for the job.
Our challenge, in today’s environment, is to construct portfolios that will generate the best risk/return profile in order to meet clients’ long-term objectives. With interest rates near historic low levels, the expectation for bond returns over the long term is only about 1%, which is the current yield on the global bond benchmark. Our expectations for long-term global equity returns, based on a compilation of market expert projections, is approximately 6.5%. As a result, the estimated long-term return for a typical 60/40 portfolio would be around 4.3%. We aim to do better. First of all, we expect our bond and equity managers to add value on top of the projected public market returns indicated above. Secondly, we prefer not to build typical 60/40 portfolios for our clients. We construct more diversified portfolios that include a number of alternative asset classes with attractive returns, which are less correlated to public markets, thus reducing the volatility or risk of the portfolios. This results in portfolios that offer much more attractive anticipated risk/return profiles over the long term.
Wishing you health and happiness in the new year.