As with all good investing, any strategy that involves making money from stock markets in 2021 must consider the economic outlook but I would argue that in terms of impact, Covid-19 may be further in the rear-view than some investors think.
There is a scenario that when the authorities have vaccinated the most vulnerable in society that the issue of an overwhelmed health service will start to recede. And then there are personal savings which have risen to record-high levels because people have had fewer places to spend during the crisis.
Around the world, the targeted government supports, massive fiscal and monetary stimulus have flooded the system in 2021 with cash, which has led to crazily low-interest rates and negative interest rates on large bank deposits. Despite the prevailing poor economic indicators, global markets have continued to perform during the pandemic.
The market is so awash with cash it is chasing any asset for a return and with many government bonds yielding a negative return, even more money is being driven into shares, commodities, and corporate bonds.
There is little perceived downside risk as large-scale corporate defaults are unlikely with this much stimulus. And even if the news from the pandemic gets worse, governments will increase stimulus, which means that stock markets view the pandemic as essentially a free bet.
We expect a spending boom in the second half of 2021 as people cannot wait to travel, go out to pubs and restaurants, sporting events, and concerts. Also, do not underestimate the potential, in the long run, for a big jump in inflation as the spending boom gets underway.
There will continue to be a move away from dependence on China for key supplies because of the pandemic. The trend toward off-shoring should move to on-shoring, and this will be inflationary also. Everything points to value outperforming growth.
Value investing is a relatively dull space for investors, which does not get the types of returns experienced in growth stocks such as Netflix, Amazon, and Tesla.
However, growth market valuations look extremely dangerous, and any shock will see substantial corrections. Value stocks, which include healthcare, consumer staples, industrials utilities, energy, and some finance companies offer a lot of protection against a shock, as they are so under-valued and have been ignored for years.
We are already seeing a move into value stocks -- and that looks to be the play in 2021.
The dollar, which has enjoyed a constant stream of foreign inflows since 2014 now looks like it is in decline. Also, when you invest in US stocks you are exposed to the value of the dollar and our view is that the dollar will continue to decline in 2021, falling another 10% if not more.
This may mean that a standard portfolio mix of S&P 500 stocks and western European bonds will underperform badly into the future.
Anyone with that asset mix, and it is the most common portfolio, needs to look to re-balance their holdings.
Historically a lower dollar is a big tailwind for emerging markets, Asia, Japan, and other markets.
Overall, we really like the market outlook for 2021 so here are the areas we feel will perform best.
Expect governments in Europe, in particular, but also in the rest of the world to pump more fiscal support into green energy projects.
In the UK, so-called small- and mid-capitalised companies look cheap in terms of stock market valuations, and partly because of the long-drawn-out Brexit drama, the world is underinvested in British assets.
Mid-caps stock market firms in Britain are better value than the Ftse-100 stocks.
The Ftse-100 is for sure part of the value bucket relative to the more growth-oriented US mega-caps but mid-caps are more idiosyncratic in nature and less correlated to the big indices, which is what you, the investor wants. Yields and valuations in the UK mid-caps are better, which could also benefit from the potential pick from the appreciation of sterling after the Brexit deal.
Technology stocks are basically a long duration play.
If inflation emerges, tech stocks become very exposed at current valuations.
Big Tech is also probably looking at higher taxes and higher regulatory costs which should eat away at margins.
We expect US stocks and specifically Big Tech to underperform in some areas of the market.
Meanwhile, there are the global free trade pacts to consider.
The conclusion of a new overarching free trade agreement between 15 Asia-Pacific countries has been celebrated across the globe.
Its signatories are the 10 members of the Association of Southeast Asian Nations, or Asean, countries, as well as Japan, Korea, China, Australia, and New Zealand. India withdrew from the agreement at the last moment.
The formation of this new Asian trading bloc of 2.2 billion people will stimulate growth in the Asia-Pacific region.
Japan, in particular, offers particularly good value, and the Japanese are leading the charge in stimulus measures including buying shares directly.
Investors are as the term goes "income repressed" and companies that can consistently grow dividends while maintaining stable balance sheets will benefit from buyers chasing yields.
This will be particularly significant in Europe where valuations are currently half that of the levels in the US.
However, the strength of the euro against the dollar will not be a good thing for European exporters that do a lot of business in the US.
Although we really like European stocks, we think that that means not all European companies will benefit.
In precious metals and mining, the silver mining companies look incredibly attractive on a fundamental basis and the sector is in great shape. We expect the miners to outperform the much wider metals sector in 2021.
The electronic vehicle trend is all about the suppliers of copper and nickel.
In times of war, companies selling bullets make more money than those selling guns.
The same analogy applies to metals and electric vehicles.
The trend is in play over the rest of the decade that all countries face meeting strict emission targets.
Copper miners are unbelievably cheap relative to the metal itself.
In summary, if you have large exposure to US stocks, as is the case for many pensions in Ireland, you are more vulnerable to low returns than ever has been the case.
In the case of US stocks, the loss of capital and the depreciation of the dollar could be a double whammy.
The standard portfolio of US stocks and western European bonds had served very well over the last decade.
The rest of this decade is going to require a more sophisticated portfolio than the "off the shelf" offering.
In terms of risk, despite the global pandemic, we believe the markets are relatively stable, unlike the underlying economies.
It may be hard to rationalise that while economic activity struggles, that markets can boom amid the huge amounts of government stimulus and low-interest rates.
However, the markets are not immune to corrections and that is the benefit of investing in value where any correction will be muted, and performance will be better in the long term.
--Peter Brown is managing director of Baggot Investment Partners