Chaos, uncertainty and change – three words that have become synonymous with the global economy in 2020, as the world sought to get to grips with the Covid-19 pandemic while trying to understand what the 'new normal' looked like.
The sell-off in February and March 2020 was a chastening experience for all of us, but equally surprising has been the resiliency seen in markets since April - a move facilitated by the fast and aggressive intervention by central banks across the globe.
Not only have the majority of the major global markets recouped most of the losses seen in the first quarter, but the recent vaccine bounce has paved the way for further optimism that a sustained 'V'-shaped recovery is now on the table going into 2021.
Even prior to the vaccine announcements, figures from the International Monetary Fund had global growth estimated at 5.2% for 2021 (versus a 4.4% contraction in 2020).
While there is cause for optimism, I do not think it is going to be a case of going back to normal anytime soon given the trauma we have seen.
Valuations are an interesting starting point given they come into 2021 on the back of a strong rally. Traditional valuation metrics such as the price-to-earnings ratio appear elevated when compared to historical averages.
A recent note from Morgan Stanley acknowledges this, but also notes valuations are uneven - citing the fact that Covid-19 cases and geopolitical uncertainty are still muting investor sentiment.
There is also the impact of accelerated structural change on valuations. Invesco senior portfolio manager Randall Dishmon cites the generational changes occurring in the likes of e-commerce, cloud software, medical diagnostics and digital payments, adding the market continues to underestimate the sustainability of growth for leading companies in these areas.
Something Dishmon also mentioned, which I strongly agree with, is that targeting companies because they are historically cheap can also be damaging, as they will not be protected from those structural changes that some of these companies are on the wrong side of.
According to T. Rowe Price Global Focused Growth Equity manager David Eiswert, broad-based valuations are not extreme, but certain areas in mid and large caps do look expensive.
Despite the rationale behind their growth, Eiswert is conscious to manage the valuation element of risk in his portfolio and has reduced positions in some of the outright Covid-19 winners - reinvesting into high quality product and innovation-driven cyclicals.