Following a year of depressed earnings, many markets are expected to register decent earnings growth in 2021 due to a low base effect.
By Bernie Yeo
If anything, 2020 has taught us that opportunities for investors can arise in the midst of uncertainty, and that market sentiments can change within a short span of time.
The pessimism during the first quarter, according to FSMOne research analyst Shawn Low Tian How, has been quickly replaced with a bullish rally up to the point of writing as demonstrated by the benchmark for global equities, which is represented by the MSCI All Country World Index.
Performance-wise, Low reveals that most unit trust funds have come out of 2020 in the green despite the difficulties during the first quarter of the year.
“86% of the 341 equity and 84% of the 136 fixed income funds on the FSMOne platform have clocked in positive gains on a year-to-date basis (see Figures 1 and 2). These two asset classes have had stellar performances largely due to the immense liquidity injected by major policymakers of the world,” he tells Smart Investor.
Figure 1: Equity funds have performed decently over the year.
Figure 2: Similar occurrences can be seen in fixed income funds.
“This event has once again reinforced a timeless quote by Warren Buffett — ‘Be fearful when others are greedy, be greedy when others are fearful’.
“Investors who had invested during the Covid-19-induced March sell-off would have benefitted greatly on the following run up in asset prices. On the other hand, investors who exited the market in the midst of the selloff in fear of further drawbacks have lost out on potential returns during the subsequent recovery.
“This also strengthens our belief that investors should not be shrouded by short term noises and should stay invested at all times with a long-term view,” he reveals.
Investment outlook for 2021
The conditions going ahead is likely to be constructive for equities, according to Low.
“Looking at the business cycle, we may have just witnessed a trough in 2020. Given that most leading indicators such as Purchasing Managers’ Index (PMI) or exports have begun bottoming out, the global economy could be positioned for a recovery/expansionary phase in 2021,” he explains.
“However, a resurgence in Covid-19 cases could force many economies to reimplement lockdown measures, much like how European countries are doing. Should this threat be prolonged, it will overshadow any chances for a global recovery,” warns Low.
That said, positive progress surrounding the vaccine such as the slew of efficacy test of around 90% in recent weeks have shed some light on the pandemic.
“We expect more positive news to follow suit as other vaccine developers catch up to the final phases of testing, providing more options for countries to combat the coronavirus,” he points out.
Meanwhile, the United States presidential election – which was the key risk event in 2020 – has mostly come to an end. The world will see a Biden presidency, alongside a bipartisan Congress in 2021, which is ideal for the market, reckons Low.
Foreign policies firstly are likely to be more predictable, to which actions taken could be more bilateral instead of unilateral.
“In terms of the bipartisan congress, some of the more extreme bills such as raising taxes could face some challenges in being passed, or at least being downsized. Given that extreme changes are unlikely, the probability of increased volatility coming from new legislations are likely to be low.”
While the tensions between US-China may be a recurring theme going ahead, that president-elect Biden’s stance towards China is less aggressive compared to President Trump, he adds.
Bright spots aplenty
Given that most markets have experienced depressed earnings in 2020, many markets should register decent earnings growth in 2021 due to the low base effect.
“Amongst the many markets we cover, emerging markets such as China and Asia Ex-Japan will lead their global counterparts. China, being one of the first countries to successfully curb the pandemic, is expected to clock positive GDP growth.
“Coupled with tailwinds such as growing middle income and high population, the country is one of the more fundamentally sound markets and could remain so for many years to come. In extension, given that most Asia Ex-Japan countries export mainly to China, the recovery of China could also serve to boost its neighbours’ growth,” opines Low.
Closer to home, Malaysia’s recent announcement of the 2021 Budget sets the tone for the year ahead. Budget beneficiaries include the property and construction sectors as the government focuses on providing support to low-income housing and the continuation of infrastructure projects.
The local technology sector, mainly the semiconductor players, are also expected to do well, benefitting from secular trends such as Internet of Things (IoT) and 5G technologies.
“In addition to the key risk posed by the Covid-19 pandemic, other risks are likely to be implementation risks as infrastructure projects historically have faced pause orders.
“However, we deem this risk to be relatively low given the high multiplier effect of the sector which is used to support the economic growth of the country. In terms of the technology sector, while high valuations could be a concern for many, the decent growth potential of the sector is likely to bring valuations to more palatable levels,” says Low.
Strategies to ride through market uncertainties
Due to volatility being part and parcel of investing, the strategy of investing through a diversified portfolio (incorporating different asset classes, geographies and sectors, among others) has been proven to help lower overall portfolio volatility and give investors better peace of mind in times of market distress.
To illustrate his point, Low draws attention to the start of 2020 where global equities (represented by MSCI AC World Index) suffered sell-offs of -8.2% and -13.7% in February and March respectively due to Covid-19 induced fears.
Global bonds (represented by Bloomberg Barclays Global Aggregate Bond Index), on the other hand, were up 0.7% in February and only down -2.2% in March (see Figure 3).
Figure 3: Global equities and bonds monthly returns in 2020.
The deviation in price movements is because equities and bonds are different asset classes and have a low correlation with one another, he explains.
“A mixed asset portfolio with 50% allocation in global equities and 50% in global bonds would evidently have much lower volatility than global equities over the same period.
“For example, during the Covid-19 induced sell-off, the portfolio was down -3.8% and -8.0% in February and in March respectively. The annualised volatility of the portfolio is 17.4%, significantly lower than the 30.6% that of global equities.
“As such, investors should adopt the strategy of investing through a diversified portfolio to help them ride through any market uncertainties in the future as just as it would have in 2020,” he explains.