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Executive Summary
The Year 2020 in review: A Bear, a Bull, and Quite Some Froth
When COVID-19 suddenly shuttered world economies and the stock markets fell dramatically, central banks actively supported market liquidity. Their massive interventions led to record-low interest rates and boosted asset prices. Main Street remains largely shuttered to this day, yet investors – speculators especially – profited from what has been dubbed a K-shaped recovery. Riskier stocks responded the most to these stimulation efforts.
Announcements of vaccines in the summer helped commodities, real estate names and industrials regain their footing. Inflation made a timid comeback, and will certainly be with us for a long time. (The explanation is simple: More money chasing a finite amount of goods and services inflates asset prices. This also depresses values and currencies, including the US dollar.)
The fourth quarter began with a noticeable weakness in global equity markets while interest rates rose substantially. Markets roared to a strong finish at year-end once the U.S. election cycle disappeared from the headlines. The US dollar weakened, helping commodities as well as emerging markets. As inflation expectations strengthened, sectors such as banking that benefit from higher inflation moved higher, thanks to a more lending-friendly interest rate environment.
The year closed as speculators enjoyed some eye-popping performance from the Bitcoin, various untested stocks making their debut through IPOs and SPACs, and household names with scant profits or proven business models – think Zoom, TESLA, Shopify… We have seen some heavily indebted or not-yet-profitable names outperform solid, high-dividend-paying companies. Quality companies with conservative balance sheets have done well, but not nearly to the same extent as the highflyers that captured the animal instincts of many.
However, it is important to realize that some of the spectacular profits made, say, on the Bitcoin, could just as well have been equally spectacular losses as we have seen recently. That is the nature of speculation, as opposed to investing.
Indeed, our investment discipline can be a source of underperformance, since name selection, risk control measures and selection metrics based on solvency and profitability will naturally exclude us from the fervour and alluring performance of certain names or sectors. The net result is that comparisons to indices and some competitive offerings are not up to the usual standard this year. Obviously, we would have preferred a better performance. But given the high volatility and uncertainty reigning on the markets, our first priority was to safeguard your capital. Underperforming in the short term is neither unusual nor problematic, since the reasons for the shortfall are both a function of our careful stewardship of your invested capital and the seeds of your future outperformance. As always, do not hesitate to contact us should you want to discuss any of this with us.
For 2021 and beyond, here are some metrics and trends we will be watching closely:
“Real” economies rate of recovery remains to be seen, as well as volatility levels. Inflation expectations and interest rates will determine the direction of currencies and the duration of this bull market. An upward trajectory in interest rates would threaten most asset values, including real estate. Brands, spending patterns and mobility behaviour are expected to be important determinants of performance. Finally, “Stay-at-Home” stocks versus sectors involving human interaction (retail, entertainment, and manufacturing to some degree) will be a major investment theme.
