By Stuart Paterson
WHEN reflecting on a year as it draws to
a close, investors naturally look at what they’ve held in their portfolio and how it has done.
At this time of year, we too are drawn to scrutinising in great detail each and every asset we have held and analysing its performance.
We also sit down to think about the year ahead and beyond, how we see the future unfolding (as far as we can) and what assets we should be holding. Whilst this is the rigorous process we go through on a daily basis, to take stock of the longer term trends in markets is a vital part in constructing the longer term strategic vision (and thus portfolio framework) that acts as the anchor in less predictable markets.
However, as we know, investment is not an absolute but a relative game. As we reflect on 2020 and what has performed well, particularly in equity markets, we are struck by the fact that the differentiator this year was as much about what you didn’t own, as what you did.
As we went through 2020, we saw a huge polarisation in sector performance that was driven by a number of different factors – the biggest of which was, of course, the pandemic.
However, like any earthquake, the secondary and tertiary ripples of central bank policy and government intervention created economic conditions that favoured certain areas of the market.
As growth fell, the market polarised its behaviour into the haves and the have nots: those companies that could continue to generate strong cash flows versus those that were becoming impaired by the unfolding shock to the economy and whose business models could not adapt quickly enough.
In sector terms, this played out with the information technology sector – as compared to broader global equities, at one point up 34.7 per cent – and the energy sector – down 44.4%.
As the year unfolded, the debate around “growth” (those companies that have the ability to grow their cash flows faster than the overall market or economy) versus “value” (those companies which trade at a discount to their intrinsic fundamentals) became louder with proponents of the latter eager to call the start of the market reversal.
More recently, value investors cited the 11% outperformance of oil and gas and financials versus the Nasdaq 100 as evidence that a movement towards that investment style (versus growth) is happening.
However, looking at the bigger picture, we saw the Nasdaq 100 outperform both sectors by 83% year-to-date. Therefore, it is unclear whether we are truly seeing an investment style reversal; after all, one day does not make a trend.
How 2020 shapes the future is, as yet, unknown.
In part, we see the pandemic as an accelerator of trends already in place. The move to flexible working practices and the ramping up of e-commerce are already evident, and the longer-term trends will continue to unfold as businesses adapt to this “new normal”.
What this means as it relates to the growth-versus-value debate is therefore also unclear. What we believe is that whilst market shifts and a rotation back into value may persist over the short to medium-term, in a global economy where growth is scarce, the premium that investors pay for robust and growing companies will remain elevated and should underpin our favoured “quality” areas of the market.
So as we move through into 2021, possession may continue to be 9/10ths of the investment law but pay heed to the other tenth because, as has been the case this year, what you don’t own really is just as important.
Stuart Paterson is executive director
at Julius Baer International.
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