The investment landscape - a year on from the low of March 2020

“Be optimistic, but beware – big risks lie ahead."

One of the important dates on our professional calendar is the admittedly dry sounding Portfolio Construction Forum, held annually in Sydney. The event consistently provides us with a proven touchstone against which we evaluate the outlook and the competing commentaries that lie ahead.

This year the event was staged, thanks to Covid, by video link, and this underscored one of the big discussion points: the way Covid has reframed our lives and our expectations. Or not. The table below shows how since the dire ‘lockdown lows’ of March 2020, the markets – as represented by their indices - have rebounded with gusto. What a cavalcade of growth! It is just a reminder to hold on and not sell your assets even when we’re in the gloom of a pandemic.

Backed by numbers such as these it is perhaps little wonder that most presenters at the forum (economists, analysts, researchers, academics), were upbeat about share markets. They believe that the fiscal stimuli by major Governments will both kickstart and support economic activity. This isn’t just a standard recovery either. It is being directed towards new technologies and away from activities that orbit around fossil fuels. Trends include:

  • Responsible investing being the future of financial markets
  • Capital being diverted to deal with the impact of climate change – move towards lower carbon footprint
  • Spending on infrastructure, and healthcare eg. vaccines

Says Chris Iggo, of AXA Investment Managers: “There will be new growth opportunities as many parts of the world economy have the potential to shift from being fossil fuel poor to renewables rich.”

Covid will still haunt us, but once the virus is largely under control, and most people are vaccinated, then expect a huge spillway of spending to occur where consumers have been dammed up, and not had the mobility to shop, dine out or travel.

Jeff Schulze of New York based ClearBridge Investments addressed the concern that US shares have been in a bubble - the old fashioned kind - where the bubble is doomed to burst.

“The consensus view that US equities are in a bubble are overblown due to several dynamics: index composition; low interest rates; robust forward earnings expectations; and, economic cycle positioning. In fact, economic growth in the US this year is poised to be the best in almost four decades. Policymakers are suffering from recency bias by mistakenly treating this recovery like the Global Financial Crisis. However, the backdrops between the two could not be more different”.

Policymakers are suffering from recency bias by mistakenly treating this recovery like the Global Financial Crisis.

An investment forum wouldn’t be complete without a healthy dose of pessimism. With all the shot in the arm optimism came a warning from one respected presenter, Jonathan Pain, an economist and author of The Pain Report – an aptly titled bulletin for the cautious. His words summarise his stance:

“Be optimistic, but beware – big risks lie ahead. The bad news is that much stronger economic activity, driven by $22 trillion of monetary and fiscal stimulus, will deliver higher inflation and higher bond yields. It’s back to the drawing board - this Herculean tug of war between stronger economic growth and higher bond yields will be the defining battleground of 2021 and will be accompanied by violent and rapid-fire recalibrations of relative valuations.”