With optimism in the new year 

One of the most turbulent years in modern history is coming to an end. The Pandemic has left huge scarves on many who have lost loved ones or struggled with their personal or professional livelihoods. While this applies to all facets of life, the lockdown’s impact on investors has been similarly unique. The intensity of the stock market collapse and the sudden onset of the recession were unprecedented and have truly tested the ability of companies and investors to navigate through that unforeseen and dangerous time.

But here we are. Barely 10 months after the outbreak of the crisis, we are seeing one of the most remarkable rebounds on the stock markets and an economic recovery potential, which might push equity and other high-risk asset classes even higher over the next 12 months. 

Not only did the crisis meet with an immense globally coordinated fiscal and monetary response that gave massive support to businesses, and forced interest rates to remain low, a more friendly trade policy by the new US administration, as well as continued positive news from the vaccine front, will further add support to the stock markets where investors get a broader choice of opportunities compared to this year when only a handful of stocks fueled the gains.

Many damaged industries such as travel, leisure, and energy, could benefit from it while the business models, which have experienced strong sales increases during the pandemic, will be thoroughly scrutinized and closely monitored whether they can really continue their pace of growth and earnings. The fundamentals of each company will play a much bigger role than the actions by central banks or governments. With short-term interest rates most likely to remain at historically low levels, higher long-term interest rates, and a steeper yield curve alongside with an economic recovery will favor financial stocks but put pressure on bond investors to be even more creative to find the hidden pearls. Floating Rate Notes or emerging markets with reasonable credit risk might be some areas to consider. 

What else have the last few months taught us? With the new and widely accepted role of governments and central banks as managers, coordinators and refinancing parties the era of free markets, which started 40 years ago under Thatcher & Reagan and experienced the first major setbacks in the financial crisis, are finally over. One of the best examples is the silent but creeping process of Europe becoming one state from a capital markets perspective, by issuing currency and Eurobonds directly out of Brussels and thus slowly replacing the contribution of the national European states as main refinancing source for climate, social or infrastructure projects. 

From an Investor point of view, Market signals will be replaced by political signals and decisions while volatility will increase. Timing the market will be difficult and trends even more difficult to fight, while political risks must be closely monitored and analyzed. This clear secular trend alongside with an even stronger influence of computer trading are forcing sophisticated investors to carefully even work harder on a long-term strategic asset allocation, to patiently adhere to it and to diversify across all asset classes. 

We wish our clients and their families a Merry Christmas and all the best for a prosperous and healthy 2021!