In 2020, there was only one story in town: the coronavirus crisis, and newsflow about the pandemic was the biggest driver of stock markets. With macroeconomic news affecting investments more than ever before, what are the key issues that will shape the experts’ investment decisions this year, and what could it mean for your investment ISA?
The vaccine rollout
The biggest questions on a lot of investors’ minds this year will be how quickly the world can be vaccinated against Covid-19 and when the global economy can reopen for business. A study of 200 professional fund buyers globally by CoreData Research found that 23% said fresh waves of virus cases and lockdowns were their primary concern in 2021. Ritu Vohora, investment specialist for capital markets at T. Rowe Price, says the vaccine rollout will define the year ahead, “especially given the risk of new strains reducing efficacy, and timelines around opening of the global economy”.
Reopening the economy
We are currently in a double-dip recession, and the question will be how long it lasts and how much damage it does, says Mike Deverell, partner and investment manager at wealth manager Equilibrium. While he is optimistic there will be strong economic recovery in the second half of the year, he remains cautious from an investment point of view because “things could get worse before they get better.” In his portfolios he has reduced his exposure to stocks for now to bank some previous gains, and will await a market correction before moving back in. ISA investors might want to review their positions with a view to taking some risk off the table in the short term.
Katherine Davidson, manager of the Schroder Global Sustainable Growth fund, says the current crisis has increased public scrutiny of companies, and this could continue even as normality returns. “As the pandemic hopefully fades, we expect to see more scrutiny on companies that received government support during the crisis. Some have already taken the initiative by paying back government funds, and this could easily become a political issue especially when companies look to restore dividends or buybacks.”
Vohora agrees that politics and policy will remain important this year, as governments tread the tightrope of lockdowns and supporting economies through fiscal stimulus. So far they have unleashed an “unprecedented” amount of stimulus, worth 33% of global GDP which, combined with rock bottom interest rates, has boosted investor optimism and sent stock markets soaring to record highs. If policy remains loose as the economy begins to recover, this could encourage more of a rotation from growth to value stocks, she says, and ISA investors might want to overhaul their portfolios.
The shift from growth to value
We were already seeing this happening, but Pfizer’s 9 November vaccine breakthrough was the catalyst for a major shift towards value stocks. Since then, energy stocks are up more than 30%, banks are up nearly 20% as investors sought unloved economically-sensitive companies once more.
“To me that was the start of markets really embracing the reopening theme and really believing in vaccines,” says Paul O’Connor, head of multi-asset at Janus Henderson. “If that theme remains intact, we would expect further rotation towards value sectors and markets.” This bodes well for the UK, which is very much a value market, as investors look to take money out of the expensive, tech-driven US. Many professional investors are already starting to add to their positions in UK value funds, and this could be something for ISA investors to consider at this point.
Work from home forever?
For Kasim Zafar, chief global investment strategist at EQ Investors, the key question will be whether the trends accelerated by the pandemic, such as remote working and online shopping, are here to stay. “One view is that we’ve had a massive shot in the arm for ecommerce and, when we all go back to normal, it’s going to suffer. I’m not saying that’s true, I think usage will reduce but they’ve definitely gained a huge volume of customers of all generations compared to pre-pandemic.”
Investors will be looking at whether more people working from home on a more permanent basis hastens the death of high street, and kills demand for city centre office space. Zafar suggests that, even if 20% of the population continue working from home, say, one day a week, that’s a 4% drop, which means a 4% drop in revenue for hairdressers, coffee bars, gyms and sandwich shops close to offices. “Lots of these service sector companies require footfall to make their margins and, if you drop the footfall by a small amount, that has a disproportionately high impact on their earnings.” This could have a big effect on the survival of small businesses but also on employment. ISA investors in small companies, commercial property and ecommerce in particular will need to consider how our lives might have changed once the crisis has passed.