Remember all that hope for a brighter 2021? Well, the first month of the year has certainly shown the world that improved fortunes will be hard won as the long process of vaccine rollout begins.
In terms of markets, Q4’s exuberance continued for the first part of January before a drop towards the end of the month on the back of hordes of day traders taking to discussion board Reddit and hatching stock bets to frustrate hedge funds. US firm GameStop has seen much of the activity, with the struggling retailer among the heavily shorted stocks to see its share price rocket as amateur investors piled in. The fact trading in the company was restricted on several platforms added fire to the David versus Goliath story – and does little to help the image of ‘investment’ as an impenetrable, private club that closes ranks against outsiders – and it will be interesting to see what impact this activity continues to have on markets.
We wrote in our 2021 outlook that the year would see the end of three market-shaping forces and two of these have already passed into the history books, albeit with ramifications that will only become clear in the months and years ahead. A Brexit deal finally happened on Christmas Eve and while a series of smaller stories about changed conditions have featured in the news, this is a long-term shift, particularly as Covid-19 continues to dominate attention. The UK was part of the EU for close to half a century and it will take time to reset trade relationships and working patterns.
On those more personal stories, a particular favourite saw a British expat have his bottle of Nando’s peri-peri sauce confiscated at the Gibraltar-Spanish border as it apparently contains ‘processed vegetables’. A brave new world of sunlit uplands indeed.
Meanwhile, a second market-shaping force in the shape of Donald Trump has also gone with Joe Biden safely inaugurated but, as predicted, the former President did his best to desecrate as many of the ideas the US holds dear as possible on his way out of the Oval Office. No one needs reminding of the riots at the US Capitol as Trump supporters tried to disrupt the confirmation of Biden's win and the fact the 45th President is the first in history to be impeached twice speaks to his behaviour during these events. This is perhaps the inevitable culmination of the noise that has swirled around Trump and his tenure in the White House and, hopefully, its final vestiges. Despite a full in-tray for the Biden administration and a flurry of early activity, market watchers are hoping a sense of calmness and civility is restored, and to watch the news every night without foreboding.
At the start of the month, we had runoff elections in Georgia, with the two incumbent Republicans expected to hold their seats and maintain majority control in the Senate chamber. In fact, Trump’s growing belligerence and scenes at the Capitol tipped the scale towards Democrat challengers Jon Ossoff and Raphael Warnock, giving the party overall control of the Senate, a 50/50 split with new Vice President-Elect Kamala Harris having the deciding vote.
This means we have the first unified government across the executive and legislative branches since the George W Bush-led Republicans in the mid-2000s and controlling both House and Senate should theoretically make it easier for Biden to enact his policy agenda. The Democrat majority remains slim, however, so while economic stimulus is likely to be greater, we still believe market-impacting reform in areas like technology and healthcare are less probable. Any major tax rises are also not expected this year, with the pandemic far from under control and continuing to impact economic growth.
New presidents typically enjoy a spell of strong market performance but equities have been at all-time highs over recent months. Beyond the fact that the pulsating boil of the last few weeks has finally been lanced, it would seem safe to suggest markets will react favourably to a $1.9 trillion fiscal stimulus announced by Biden, the Federal Reserve’s ongoing willingness to support markets (as reconfirmed at its January meeting), the new President’s multilateral trade agenda and plans for stepping up the vaccine rollout. We continue to remain underweight the US as there are cheaper opportunities elsewhere but if we examine earnings prospects across sectors, ex-tech offers ongoing recovery potential and we expect investors to look at these undervalued areas as economies improve. We have already seen early evidence of this, with ownership of technology decreasing and financials increasing.
That final point on vaccines recalls the third of those forces we hope to see eliminated in 2021 and, despite progress on distribution, Covid-19 and its many tentacles are clearly still with us for months to come. As everyone is painfully aware, large parts of the world are back in lockdown and, in the UK, there is no clear signal when these restrictions are set to ease.
Slightly better news came in a revised set of global growth forecasts from the International Monetary Fund (IMF), with hopes of a vaccine-powered pick-up in activity driving upgraded numbers. The IMF is now predicting global growth of 5.5% in 2021, up from its 5.2% projection in October, and 4.2% in 2022, and also reduced its expected contraction estimate for 2020 from 4.4% to 3.5% after stronger-than-expected momentum in the second half of the year. While acknowledging serious ongoing risks, the IMF highlighted government spending measures in the US and Japan as positives, with growth estimates for both significantly upgraded as a result. In contrast, activity in Britain and the euro area is expected to remain below pre-pandemic levels into 2022.
We have seen a fresh spell of Bitcoin mania in recent weeks, with the cryptocurrency surging past an all-time high of $40,000 before falling back towards $33,000 by month end. Many commentators have dismissed Bitcoin as speculation rather than investment in the face of such volatility – and for the record, we would largely agree. But a wider point to consider, particularly with stock markets at all-time highs, is that if you plot a stock such as Tesla against Bitcoin over the last two years, the price charts are not that different. To clarify, we are not saying the two are directly comparable or making a sweeping comment about all ‘tech’ stocks being in dangerous bubble territory, but there is a lesson here about herd investing. While many tech companies look in great shape for further growth and can justify inflated multiples (in contrast to the height of the 1990s TMT bubble), the priced-to-perfection nature of so many US growth businesses, and massive influence of a few giant names, continues to give us pause on this market.
Given Bitcoin’s recent surge, it is no surprise to see the cryptocurrency take technology’s crown as the most crowded trade in Bank of America’s latest monthly fund manager survey. Continuing to highlight views moving towards our long-term thinking, the survey also showed a record number of investors moving into emerging markets and expecting the region to be the top performer in 2021, as well as the most positive stance on small caps versus larger companies on record.
With that pick-up in growth and economic activity expected this year, at least in certain areas, we have increased exposure to small-cap equities in the US as these companies tend to perform better during a rebound than larger peers. This is due, in part, to the fact they have a more domestic focus and will benefit more from increased consumer activity and a favoured holding in this area is the Artemis US Smaller Companies Fund.
Looking to the next few months, consensus seems split between many urging investors to buy on the short-term ‘GameStop dip’ because of expected stimulus-fuelled recovery from the pandemic, and others fearing that an uneven vaccine rollout signals a fragile outlook amid stretched valuations. As ever, we warn against attempts at market timing and prefer to prepare than react, keeping faith that our long-term calls on emerging markets, value and smaller companies are increasingly bearing fruit.
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