A year of two halves: Will market extremes remain the 'new normal'?
The dramatic developments of 2020 continue. Chinese equities are nearly 15% ahead year-to-date while US equities are almost unchanged; has there been an unprecedented economic shock?
Growth stocks, turbo-charged by the tech leviathans have bettered value stocks by 44% just since the end of 2018. Having seen oil prices fall below zero several weeks ago, UK 5-year gilt yields are now negative while central banks are, according to one observer, set to buy $6trn of financial assets over the year ahead. Remarkable times.
Beyond the central bank chequebook, help to propel equity markets higher has come from the improvement in a range of activity measures. Globally, economic data is currently outpacing forecasts by more than it has done since data started being recorded in 2003.
Schroders' Harrison: We must be bold and act now to support UK business
We might have endured an unprecedented shutdown but the bounce back is strong. Until you deep diver further.
The most recent UK and Eurozone data still lags forecasts while Japan is missing by a country mile. The global picture is being carried by the US where economists have completely misjudged the recovery in US retail sales, labour market and the resilience of the US housing market to a degree that is unprecedented. Even without the likes of Amazon and Tesla, US exceptionalism is alive and well.
Extreme conditions in bond markets will be extended this year. The Bank of Japan froze long-duration bond yields at zero in 2016; for a while this seemed just another case of; 'it's Japan, what do you expect?' Now, however, similar tactics are expected in a range of developed economies - it has already happened in Australia. This has been done before in the US (during and after the War) but not since.
Is bank capital the next frontier for ESG?
When central banks fix yield, they don't do so for a few months; they expect freezing to last years. This has massive implications for investors; what is the point of committing capital to ten-year bonds for zero-yield? The policy goal of course is to penalise those who seek safety rather than being prepared to invest in ways that will directly promote (scarce) economic growth. It might be argued that governments need the cash but, these days, they can get whatever money they need, newly printed by their central bank.
For many investors, these extreme developments are seen as temporary distortions - much as QE was interpreted immediately after the GFC. They aren't. This is all part of the new financial landscape and even if you only want to preserve the real value of your capital you will need to embrace risk - the kind of risk that we endured in March. In a world defined by cash versus risk, panic episodes will become the norm.
The acceleration of trends around remote working and online shopping have been well documented. Another trend, bolstered by the Covid suppression, has been the migration of capital into ESG-related investments. As ESG becomes more deeply embedded into investment management and governments ‘go green', these inflows into ESG funds look set to continue.
Less positively, the question of intergenerational wealth transfers - from the young to the old, have been made more acute. As we see just how much damage has been done by the suppression to consumption and job markets, it is inevitable that some will question whether this was all worth it: the cost of saving a life in the UK has been significant, something housing and financial markets have yet to fully assess.
What a year it has been and we are only halfway through.
Stephen Jones, global CIO multi-asset & solutions and equities, Aegon Asset Management
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