Jamie Ross, European equities portfolio manager, argues that a disciplined, balanced approach is key to this asset class in 2021.

Key takeaways:

  • Adhering to a robust and repeatable investment process is key when navigating volatile markets; we will maintain a disciplined approach in 2021.
  • We believe a balanced stance is important when entering 2021 as this allows the flexibility to move into defensive or cyclical businesses depending on how quickly things normalise.
  • The ‘virtualisation of life’ and sustainability are key investment themes that we believe have been accelerated by the COVID crisis.

2020 was a particularly volatile year and one that was a good test of our investment approach. We are firm believers in the importance of having a robust, repeatable investment process that forces disciplined and unemotional decision making. Adhering strictly to our scoring, system-based investment process, we made two key changes to positioning during the year. First, we took advantage of depressed valuations by initiating three new investments towards the trough of the crisis and second, towards the end of the year we shifted the portfolio to take advantage of a reopening of the economy. This year has increased our confidence in our investment process; we will maintain our disciplined approach.

Positioning for a return to ‘normal’

There are two things that we see as particularly relevant for 2021.

First, with 2020 having been a year heavily disrupted by COVID-19, 2021 should be the year when the world begins to return to normal. This means that investments that worked in 2020 may well not be the best investments for 2021. A decision needs to be taken whether to continue to own defensive businesses – whose earnings remain relatively stable during economic downturns – or to shift into beneficiaries of the reopening of the global economy.

In the run up to the Pfizer vaccine announcement and in the days that followed, we made the decision to shift the portfolio to a much more balanced stance and this is the way that we will remain positioned heading into 2021. We have found attractive opportunities to invest in a number of more cyclical companies, ones where we are modelling a significant improvement in returns (return on invested capital or return on tangible equity in the case of banks) as life returns to ‘normal’. Examples include auto parts and tractor companies, airlines and banks.

Second, and related to the first point, COVID-19 will have a lasting impact upon a number of businesses. In many cases, the pandemic has acted to speed up structural change that was already becoming well entrenched. Although slightly contradictory to my first point, the long-term impact may well be that companies seen as ‘COVID-beneficiaries’ will exit this crisis as better-positioned businesses.

In striving to position our portfolios for a cyclical recovery in 2021, it is important that we do not lose sight of the structural changes that are underway.

The accelerated adoption of virtualisation

I will embellish upon the point I made on structural change.

The ‘virtualisation of life’ is a key theme for a number of our investments. Post crisis, consumers will be far more willing to transact online, to conduct meetings online, to socialise online and to receive medical attention online. These themes were present pre-crisis, but their speed of adoption has accelerated. Businesses such as takeaway food delivery companies, online pharmacies, telco towers businesses and gaming firms may be among the beneficiaries of COVID-19-accelerated structural change.

We also view sustainability as a key theme. We think that the crisis will focus our attention more on the world around us and on the challenges faced by our society. Sustainability is another theme that was already growing in importance pre-crisis but will become ever more important post crisis. We see this as a multi-decade theme rather than a multi-year theme.

Keep an eye on growth versus value in 2021

For many years, growth has outperformed value as a style factor. This has been symptomatic of low interest rates and low inflation. In recent months, value has started to outperform growth, led by hope around the economic implications of the reopening of the global economy. Growth versus value is thus a key chart to watch for 2021, it will tell you all you need to know about whether the economic recovery is gaining or losing pace. Equities should act as a forward indicator of change.

 

Glossary

Cyclical stocks – companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.

Growth stocks – a share in a company that investors anticipate will grow at a rate significantly above the average growth for the market.

Value stocks – a share of a company that is believed to be undervalued by the market / investors.