By Stephen Jones

Given the result of the US election and as Brexit looms large, rarely has the turn of the year offered so much change.

Waiting for the final instalment of the UK/EU divorce saga, it is timely to reflect on the momentous year past. Standing back, with global equity markets currently returning just over 13 per cent this year to a UK investor, marginally more than the annual average return since 2003, what was all the fuss about?

Consensus economic forecasts suggest that even when we enter 2023, the UK economy will still be 2.2% smaller than it was in 2019. The credit crunch led to a persistent loss of UK economic growth – equivalent at the end of last year to a 12% shortfall – and the gap was starting to widen. The 11% contraction forecast for 2020 eclipses the great financial crisis downshift and has already brought about material changes to how we work, rest and play. It would be naïve therefore to expect the Covid-19 shock to be any less long-lasting. Long Covid is not going to be confined to a health condition.

The Covid-19 shock was as much a crisis of healthcare provision as it was of health itself – it was an inevitable consequence of health services being run on a productivity model. Next year the Government might act to build the spare capacity needed to allow the economy to remain open for longer, should another pandemic hit. However, given the weak economic outlook, the investment will probably be delayed. Nonetheless, public spending – on the NHS at least – is going to have to increase. And if the economy isn’t going to generate the cash needed or if the Bank of England stops printing it (to protect its credibility), then taxes will have to rise.

In 2020, we saw strong investor demand for environmental, social and governance (ESG) products, and renewable assets sustained their popularity through the tumult. With China recently, and the US soon, adding to efforts already announced by the EU and UK, the renewable and green energy sectors look well set as a focus for investors. Given the scale of investment required, a steady supply of assets is inevitably helping to support much-needed strength in global manufacturing.

In stark contrast, non-renewable energy stocks have been dreadful investments over the past 10 years – while global equities returned 10.6% per annum, the energy sector has delivered an annualised loss of 1.5%. This sustained underperformance has resulted in the energy sector in the MSCI World Index having a combined value equal to that of Amazon (and well short of Apple and Microsoft). Downshifts in the US dollar – we’ve been in one since early summer – will invariably deliver a boost to the global economy that, in turn, will turbo-charge the oil price. After years of under-investment the industry’s supply-side response is impaired, perhaps setting the scene for a squeeze in oil stocks. Oil stocks’ poor performance has flattered “exclusion” as an effective ESG management strategy. It remains to be seen if it looks as good if oil soars.

Covid-19 apart, the US election was the event of the year. Given his fiercely pro-business agenda, equity markets might have preferred to see Trump re-elected. After his defeat, investors have, though, taken comfort from an end to policy-by-tweet, the restraint that a likely split US Congress will exert on Joe Biden, and hopes for quieter geopolitics. Biden’s victory may well mean that US/China headlines take on a more subdued tone. Recently, we have seen moves to force more than 350 Chinese firms to de-list from US exchanges unless they open their books to public scrutiny. At the same time, more Chinese companies have been blacklisted because of their links to the Chinese military. All of this suggests that tensions with China may not ease much.

While Biden has been forming his Cabinet, it has been incredible watching Trump organise his own leaving whip-round, pulling in more than a quarter of a billion dollars, largely to spend any way he wishes. He has also been doing everything he can to leave unresolved issues around the US economy, to maximise the challenges that Biden will have to face. With a month of his presidency still to run, he probably isn’t done yet.

Above all, 2020 demonstrated, in the short run, the power that Central Bank liquidity can have over fundamentals. This won’t have been lost on policymakers who will be doubly quick to get the cheque book out to meet any future downdraft. This is fine until the cheques start to bounce. This is a story told when, not if, but not probably anytime soon.

Stephen Jones is chief investment officer (equities and mutli-asset & solutions) at Aegon Asset Management