Goodbye to 2020. Hello 2021.

Goodbye to 2020 – we’re sure we’re not the only ones feeling glad to see it go.  At the cusp of a new year, we tend to look forward to predict what the coming year is likely to bring, whether in respect of our health, business or our personal life. However as we were saying goodbye to 2019 who could have possibly predicted what the incoming year had in store.

How many points will Liverpool win the league by, where are we going to go for that well earned summer break, or how will our careers develop were thoughts we were probably thinking about this time last year and not long periods when all forms of sport would be banned, the highlight of the week’s activity would become standing outside our houses clapping NHS workers, and arguing with travel companies about refunds when our holiday flights were cancelled.

It was early in the year when the first impact of Covid-19 made its appearance as analysts started to mark the value of shares down across the world as they tried to evaluate the likely impact of the latest virus contaminating Asia.  Asia seemed a long way away at that time and they had previously experienced other major virus problems that had never transmitted to the West, so the initial concerns were about its impact on the global economy.  Stock markets fell heavily and the main issues appeared to be financial but in March that all changed dramatically as the Virus spread its tentacles throughout Europe.   Hospitals in Italy became over run and other countries followed in having to face the unprecedented reality of lockdown, including the UK.

The financial authorities were encountering a major new type of problem.  We had experienced market crashes in the past, including the financial crisis of 2008, but these had always resulted from failures in the financial system or over exuberance by investors being brought back down to earth. Dealing with a financial crisis caused by a medical issue, completely outside the control of the financial authorities was unique.

The virus seemingly could only be ‘defeated’ through people abstaining from human contact or alternatively allowing it to run its course, potentially killing millions until we developed herd immunity.  It was impossible to predict how long it would take to get it under control but with frightening predictions of staggering death rates, Governments decided they had no option but to  halt the spread of the killer virus through locking down their countries and voluntarily shutting down their economies.  Not an easy decision as this brought the prospect of millions of redundancies, potential collapse of the banking systems as borrowers defaulted on loans, and whole industries such as aviation and hospitality being completely lost for the foreseeable future.  Happily lessons that took a couple of years to learn in 2008 were learnt in a matter of days and central banks around the world opened their purses.  They started paying workers’ salaries for staying at home and provided companies with loans to help them survive until some form of normality returned, as well as delaying payments for tax and loan repayments.

Unsurprisingly such disruption in our everyday lives also had a major impact on global financial markets as investors took a step back to evaluate the impact of all the chaos around them.  The vast amounts of liquidity being pumped into the markets by central banks succeeded in  stabilization whilst longer term solutions were sought and it became clearer which companies would survive and those which would struggle.  In these circumstances it became critical for investors to be able to pick individual stocks rather than tracking indices.  Not all indices have performed equally, and even those that performed well have experienced a wide range of performance on individual constituents.  For example, although the S&P 500 has recovered from initial falls to record highs during the year, many companies included in the index remain well below pre-Covid levels whilst companies such as Apple, Amazon, or Netflix have registered strong gains and substantially increased their weighting.  Tesler is another share that experienced phenomenal returns this year and some of this may be investors taking a long term view of the company’s prospects, although most of its profits last year came from the sale of carbon credits as opposed to the manufacture of cars. However some of this growth may also be the surplus money supply looking for a home pushing the price to unsustainable levels, as investors avoid the areas that have suffered such as travel.

If nothing else, this has taught us the folly of believing we are in total control of our lives,  reinforcing the need to be sufficiently flexible and successfully adaptable to a new environment.

Nevertheless we do still need to look ahead, make some assumptions of what we believe will happen, and how that is likely to impact on us personally.  The key to everything lies with how quickly the virus can be brought under control and our best hope for that remains with vaccination.  The news that we have 3 vaccinations that offer great hopes of success is very encouraging, but despite the amazing speed at which they have been developed, it will take several months to get enough of the UK population vaccinated before normal life resumes and longer still for it to become available in enough other countries for us all to be able to relax.

In the meantime we can expect further setbacks whilst we gradually try to reopen the economy; it will also become clearer which of the changes we have experienced over the last year will remain and which will simply fade away.

One of the key developments has been the advances made by new technologies. Lockdown has accelerated the use of systems like Zoom which will reduce the demand for business travel and boost the numbers able to carry on working more from home, albeit probably not as much as one may have assumed in the early days of lockdown.  Initially it was forecasted that companies would need much smaller offices but the social benefits of human contact are now recognised as a necessity for positive mental well-being.  Similarly, management teams have been reminded how important face to face meetings are when making key decisions.  These considerations are likely to have a significant influence on the property market and whilst it is likely that workers will expect to have more flexibility to work from home, office space will continue to play a key part in corporate life.

One of the major investment trends in the past year has been the focus on sustainable investment. This is very different to old style ‘ethical’ funds which claimed to avoid companies who benefited from unethical practices, but then tended to underperform the broader market, unable to reflect everyone’s ethical beliefs.  Sustainable investment really goes back to the core of companies meeting social needs, by taking a responsible position to issues such as the environment and global pollution whilst demonstrating good corporate governance. These firms are likely to be around for a long time.  This trend is forecasted to grow as customers are becoming increasingly resistant to buying cheap products that either damage the environment or pay employees in emerging markets sub standard salaries and horrendous working conditions.  In this way good practice and sound investment go hand in hand and become more ‘mainstream’ rather than just a specialist market.

Government borrowing has soared to enormous levels in 2020 which will potentially continue well into 2021 as the global economy continues to limp along under the need for more support.  But there are also some positives.  Whilst borrowing is at record levels, interest rates are close to zero, so funding the debt will not be diverting wealth to simply paying interest. However, in the longer term the actual borrowing will still need to be repaid, which will include tax increases, inflation, and economic growth.  It will be a fine balancing act as tax increases will enable government to pay off debt but will reduce the spending power from the consumer.  This is needed to stimulate demand to get people back into work and decrease the cost of social benefits, which as part of the economic cycle then produces more tax revenue.  Society also has pent up demand for products and services we have not been able to spend money on recently, and for those who have kept their jobs, they will have accumulated savings they’ll be dying to spend once restrictions allow.  All this will help get economies working again and there are encouraging estimates for economic growth over the next year, probably driven initially by Asian markets which ironically have suffered less from the pandemic and have actually achieved economic growth during 2020.   Modest inflation will also help reduce the real cost of repaying debt in the same way as it has supported the housing market in the UK for many years, as salaries have increased to help pay off mortgages set at historic property values.

In short we have all had a difficult year in 2020, and the early part of 2021 at least is looking to follow suit, but we can see the first signs of sunshine breaking through the clouds. It will not come in one big bang, but we have learned to adapt quickly to the virus, our scientists have given us tools to help us fight back, the financial markets have held up very well and are in a strong positioned to achieve sustainable advances once we can finally return to something we can recognise as ‘normal’.

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