2020 – A Year that will certainly be remembered!

Sometimes it is difficult to remember when things happened or what of significance happened in a particular year but that won’t be the case with 2020, of course. Just as virtually everyone can recall that World War 2 ended in 1945, the attacks on the New York World Trade Centre occurred on September 11, 2001, everyone will remember that 2020 was the year that Covid-19 (Coronavirus) spread throughout the world causing enormous loss of life, disruption to the way we live and great financial damage. It also heralded unprecedented action by Governments and Central Banks to assist the unemployed and businesses, resulting in enormous deficits and unprecedented lowi interest rates.

Investment implications for 2021

With Covid-19 still raging in the USA and Europe, but effective vaccines now starting to roll-out, the next six months are likely to represent a choppy transition to the post-pandemic investment environment. While many problems persist and setbacks are inevitable, as Sydneysiders are now experiencing, investors should remain focused on the longer term rather than trying to time the ups and downs of short-term market gyrations. Of course, those with cash and a longer-term investment horizon may wish to take advantage of the inevitable market downturns when they occur.

While the US political system is likely to be mired in the gridlock of divided government, limiting President Biden’s scope to use fiscal stimulus to encourage growth, the EU recovery fund and ongoing Chinese stimulus measures offer some hope of an economic rebound. Central banks, including the Reserve Bank of Australia, have few tools left at their disposal to further aid the economic recovery.

With low or even negative real interest rates in most countries, defensively-minded investors seeking income will continue to struggle to find attractive opportunities. Government bonds in most developed countries, including Australia, are below 1% and unlikely to rise significantly in the next few years. Likewise, secure bank deposits are offering very low rates and are unattractive to savers/investors, particularly after you reduce the nominal rates for inflation and tax.

Low interest rates have already caused investors to move money into shares and, in Australia and some other countries, into residential property. While prices are certainly not cheap, this is likely to continue given the very low returns on offer from less volatile investments.

Much of the recent share-market action has been in technology stocks, such as the FAANGs in the US (Facebook, Apple, Amazon, Netflix and Google) and Afterpay & Xero in Australia. Some of these US businesses are growing their earnings rapidly and arguably justify their strong price growth, but some of the “stars” like AirBNB, Uber and Afterpay have yet to turn their growth into profits so investors should be cautious as prices can rapidly fall if growth and earnings disappoint. Quality stocks, on the other hand, have a long history of outperforming markets through the economic cycle so are generally lower risk.

 

Holiday Reading for Investors

There is never a shortage of articles in the holiday period about the outlook for the coming year and where you should be investing, but for those interested in something more substantive I recommend the following two free Australian websites:

Livewire: https://www.livewiremarkets.com

FirstLinks: https://www.firstlinks.com.au/

If you are inclined to read an investment book, I highly recommend;

Howard Marks: The Most Important Things.

Lastly, a thriller that I recently read and greatly enjoyed, but which is also a true story::

Bill Browder: Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice

 

Seasons Greetings to all and let’s hope 2021 really is a better year.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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