By Stephen Martin

Anyone who made predictions for what 2020 would hold around this time last year more than likely saw them all quickly swept aside. It was a turbulent 12 months, with the Covid-19 pandemic bringing about a series of economic challenges that had a significant impact on markets – in some cases, in ways that few people would have thought.

Although we find ourselves in lockdown once more and it may be some time yet before we return to any kind of normality, 2021 does bring a renewed sense of optimism for what lies ahead. While stock markets have shown some volatility since the start of the year, they have also largely proven resilient despite swathes of negative headlines.

Part of the reason for that is the belief that over the coming months a range of macro-economic trends are likely to lead to a more sustained recovery – among them, the development and distribution of successful Covid-19 vaccines, the continued rise of technology, the deployment of record levels of consumer savings and a more collaborative US president.

These developments will have a knock-on effect for a range of sectors and individual companies in the coming 12 months – some of which we began to see at the tail end of 2020. For example, 2021 could see some of the UK’s household names make big moves to prove their relevance and commitment to long-suffering shareholders as markets recover, with parallels to the economic situation at the beginning of the 1990s.

For instance, last year a weak share price accelerated discussion of strategic change at Aviva, the insurer. GlaxoSmithKline has also been linked with a split in its consumer and healthcare businesses – a move discussed since 2017, which came to the fore again.

The big question for many companies this year will be whether they can make a quick return to form or whether they will suffer long-term consequences from the pandemic. Diageo seem primed to jump back into action with the return of its premium markets like hotels, events, and duty frees.

On the other hand, some businesses are in tricky strategic positions, such as Royal Dutch Shell which will need to exert a great deal of effort exiting the oil and gas markets it spent so long cultivating. Other companies have had to adapt their offering altogether in 2020 to remain relevant. As this trend continues, we expect to see the rise in mergers and acquisitions involving UK companies in late 2020 maintain momentum. The likes of RSA Group, TalkTalk, William Hill, and McCarthy & Stone were involved in bids and we anticipate focus moving away from these middle plays towards weaker and stronger businesses.

A company like Sage could fall into this category, given its issues in lockdown and even prior to the pandemic. Crest Nicholson could be another, with its history of ownership and private equity’s penchant for returning to familiar assets.

There could be geographical swings too and none more significant than an eastward shift in consumption. For years, Asia has relied on other parts of the world to absorb the goods it produces, but 2021 could be the year that changes, with consumers in Asia – especially China – becoming the markets for their own products.

This could be a crossroads moment and investors would do well to identify companies with exposure to Asia. While some will be familiar – LVMH, Apple, and InterContinental Hotels Group among them – others will not and the best way to access these will be through collective vehicles such as investment trusts and funds.

Of course, 2021 will no doubt have its challenges and one of them is likely to be income. Dividends tend to be economically sensitive and look unlikely to return to 2019 levels any time soon – not least as companies look to retain flexibility on balance sheets for further bumps in the road.

The key for investors will be to look ahead, rather than to the past, for sources of income. Yields of 4% are likely to be the outer edge and investment trusts like Finsbury Growth & Income, Troy Income & Growth, and Murray Income may well be the places to find them.

It may have been a difficult start to the year, but we can say with some degree of confidence that there are reasons to be optimistic about what 2021 holds in store. Nevertheless, there will still be volatility, interest rates look like they will remain at record lows, and economic challenges lie ahead.

It has, therefore, seldom been more important for investors to ensure they have taken advice and developed suitably diversified portfolios that will provide risk-adjusted returns they need to deliver their financial goals.

Stephen Martin is head of office at Brewin Dolphin Glasgow