Finding stability
In Hervé Le Tellier’s1 novel L’Anomalie (The Anomaly), after a freak encounter with a giant cumulonimbus, passengers on a flight from Paris to New York find themselves confronted with a changed reality that upends their lives and the entire world. As in the novel, last year the whole planet was called upon to deal with an unimaginable event, which has changed our lives and the shape of the global economy.
2020 will be remembered as a unique year for many reasons. A year that was marked by a pandemic with widespread consequences, which occurred in a climate already close to hysteria.
Firstly, hysteria in international relations, as restrictions on interaction and movement were grafted on to the protectionist measures and trade war initiated by the US administration. Global trade in goods is predicted to show a decline of over 5.5%, its biggest drop since the 2008 crisis. Meanwhile, services trade is set to show a collapse of close to 16%, the biggest fall since 1990, the year UNCTAD began publishing statistics2.
Next, we had hysteria in domestic political responses. Although the Brexit psychodrama is over, at least for the time being, the process reached its conclusion 1,646 days after the UK referendum with numerous subjects not even touched upon, including financial services, which account for 7% of UK GDP. Across the pond, the weaponised tweet politics of President Trump – making the transition of power chaotic to say the least – will be remembered for a long time inside the US Capitol.
And finally, hysteria in financial markets, which saw one of the swiftest falls in their history in the first quarter of 2020, followed by one of the quickest bouncebacks too in the case of the US market. The announcement of the successful development of a number of COVID-19 vaccines in November resulted in the best monthly performance of the Dow Jones since 1987, the best November for the S&P 500 since 1928, and the best monthly performances in equity market history in Italy and Spain.
One might even wonder whether the world’s major stock market indices would have reached these dizzy heights in 2020 without the “anomaly” of the pandemic causing an unprecedented global crisis. We can’t be sure, but luckily the human race and its institutions have learnt the lessons of previous crises. A combination of massive fiscal and monetary support policies was used to counteract some of the effects of the crisis, and the errors of 2008/9 and the European sovereign debt crisis in 2011 when support was too short and hesitant were not repeated.
Hopefully, the extreme polarisation of responses that dominated 2020 will give way to greater stability in the world and in the markets in 2021. There are a few bright spots on the horizon, with the roll-out of the first vaccine campaigns, a new US President with a more diplomatic and traditional approach, and greater differentiation in the valuation of the various asset classes and sectors. A cocktail that bodes well for risk taking.
Running parallel to the vaccination campaigns, the improvement in the economy should lead to a recovery in high-quality cyclical stocks and reduce their excessive valuation gap versus growth stocks.
After the index-dominated year of 2019 and the sector-dominated year of 2020, 2021 may be the year when some sort of stability returns to valuations, and there is greater discrimination between the quality and therefore the stock market performances of companies.