Active investment commentary & analysis

Does the rear-view mirror tell us much about what lies ahead in 2021?

Strong stockmarkets make fund managers even more confident. Although 2020 has mainly been a growth stock year, the recent rotation has made value managers look smart, too. But does the rear-view mirror tell us much about what lies ahead in 2021? Bull markets can encourage investors to overlook their poor record on forecasting. Might we all underestimate the potential speed and scale of an economic rebound?

Anchoring expectations in the present is the biggest challenge to envisioning something entirely different. Related to the concept of priming in psychology, it means that experience can unhelpfully influence later analysis. And current expectations looks like a slow climb to economic recovery held back by unemployment, tax rises, consumer and business uncertainty, and widespread debt and defaults. It is hard to see a dramatically brighter future through the lens of today’s pessimism and what looks like a generation of paying for the pandemic.

Certainly, there will be a cost - and not all financial. Younger people, in particular, will take time to overcome their educational and career setback.  But the economy might surprise us all. Savings are high, and could fuel what looks like pent up consumer demand. Businesses need to restock and that rapid rebuild of inventory could come alongside some government pump priming.

The economy will come out of the pandemic with some positives. Industrial change has been accelerated, taking out outdated business models and unproductive capacity. The slow demise of department stores began long ago. High Street retail needs to re-invent itself around customer engagement and better experience. In the very short term this shakeout hits jobs, but new businesses could fill the gap. Growth often accelerates after efficiency improvements. Consumer demand will be driven by a renewed interest in wellbeing and the home: businesses will invest in mobile service and resilience.

The new direction of the economy will be encouraged by government, incentivising investment in sustainability and environmental improvement. 2021 will also bring a tougher stewardship code for investors that aims to drive ESG through institutional shareholder action. Many companies have been forced to cut costs and more clearly understand their edge. They now know precisely what capital they need, cutting out low return activities. A renewed sense of national purpose combined with efficient business could drive UK growth as demand recovers.

Technology might further boost this change. Currently, investors tend to see technology mainly in terms of the US FAANGs, overlooking many new technologies moving into view that could impact industrial processes and our daily lives. Much of this invention is in universities and start-ups, only reaching the stockmarket as it is commercialised. This is being flagged in the strong performance of technology funds investing privately - the only way that most investors can access these developments. But in the coming year, IPOs may spur thoughts of a new industrial revolution. Renewed dynamism in the global economy could surprise investors.

If global growth exceeds today’s expectations, pockets of overheating might emerge as 2021 progresses. Central banks could be unprepared for a v-shaped recovery. In sectors such as airlines where capacity has been taken out, the survivors may even be strong enough to hike charges. But it is unlikely that stimulus will be unwound before global growth is restored, and the main danger for investors might be a global pattern of rising interest rates. We can expect some zombie companies to fail as growth resumes – banks tend to support them only until restructuring is possible. But rising failures should not scare investors. Recovery seems unlikely to precipitate a crisis.

Christmas in lockdown is not the best frame for forecasting. Currently, the narrative of a long haul for the global economy gets a lot of attention from press and politicians. It is tempting now to take profits after some strong share price moves – but investors should recognise that mood can drive poor decisions.

A version of this article was published on Citywire on 15/12/2020.