Who would have thought in the dark days of March 2020 that the year would actually turn out to be a good one for investors? Events have confounded the experts as much as the amateurs, and it would be a very brave pundit indeed who makes confident pronouncements on what 2021 will bring.

That said, there is still value in trying to make educated guesses as to how things might play out so we can position our investment portfolios accordingly. Multiple risks remain and new ones could certainly emerge. Yet there are also rewards to be had, too. 

Carefully balancing risk and reward is the essence of good investing, which is of course easier said than done at the best of times and especially so now. We must make all efforts to try to read the runes, however. There are several themes with quite a degree of consensus around them. 

Despite the West still being very much in the eye of the pandemic storm, vaccine breakthroughs have turned our gaze to recovery, and more specifically its rapidity and shape. Buoyant markets seem to be anticipating (as we all pray) that major economies will have vaccinated much of their populations by the summer, effectively ending this scourge. Yet this timeline isn’t assured if efficacy, distribution and take-up are not what we hope. The potential for new waves and further lockdowns is real, and the wise will bear in mind that markets could lose their record gains as quickly as they were made. I’m certainly not sure the only way is up for equities, at least in the near term.

Balancing acts
Governments and central banks face an extraordinarily difficult balancing act: on the one hand there is spiralling debt to contain; on the other, the risk that prematurely tightening monetary and fiscal policy will derail recovery, as in the recession following the Global Financial Crisis. Inflation expectations have been rising, but how far and how fast is the key question. Any dramatic spikes could prompt tightening measures which markets will be anxiously watching for signs of, with significant pullbacks a likely result if they do.

Naturally, inflation and interest rates have important implications for government bonds. Many experts believe that recovery-induced inflation may be higher than their yields for some years, leading to investors losing money in real terms. Add in the potential for interest rates being upped to cool economies felt to be running overly hot, and the returns picture worsens still.

How much to pay for safety is a perennial question for investors, and it now has added bite when we consider that it may in fact be illusory. Government defaults are rare but not an impossibility, leading to debt restructures that inevitably result in investors taking a significant haircut. For all but the most solidly rated paper, I’d be carefully weighing up the “safe haven” status of gilts, and then factor in the low-to-no yield picture for those that are gold-plated too.

I recently wrote about how the past year has led many to question structuring portfolios 60-40 equities to bonds, but as most have concluded, this time-honoured strategy is likely more down than out. The ballast that bonds provide in times of volatility remains highly valuable and, as discussed, we may still be sailing into very choppy waters indeed. The buffering of our portfolios taken care of, we can then turn to higher return opportunities – and in such a fast-changing world I would argue there are many for the savvy to seek out.

Forwards, not back
Although it may be obvious, it is worth saying that the key to supercharging growth is positioning portfolios for future trends, rather than looking in the rear-view mirror. This maxim has two facets.

The first is to accept that we really are in a new world, the pandemic having accelerated - and created - a plethora of trends. We may hopefully return to normal very soon, but that normal won’t be precisely the one of old. Working practices, global trade logistics, retail habits, environmental attitudes and more have been shaken up in myriad ways that I can’t see being reversed.

The second, and perhaps more difficult conundrum, is picking future winners, rather than ones where much of the growth potential has already been priced in and downside risk is starting to creep in. Technology equities (and specifically the US ones) may be a case in point here. These have enjoyed soaring profits and valuations through serving as our lifelines during the crisis, but many see them as now looking expensive, particularly if we consider the regulatory backlash that seems to be brewing around monopolistic behaviour and issues like publisher responsibility on social media. Corporate break-ups and harsh penalties could well be on the horizon.

It is also worth considering whether people will want to spend so much time in front of screens when we have our freedom again - I know I certainly won’t. It is easy to see how travel and tourism, one of 2020’s most unloved sectors, could quickly become a darling again. And so, the world turns.

If our crystal ball seems cloudy, that is because it is – perhaps more so than ever before. All we can do is seek to maximise rewards and minimise risks, and that means focusing on the most important thing of all: diversification. 

I look forward to dissecting that all-important concept in my next blog piece.

Important information
This piece is for informational purposes only, and is not intended in any way as financial planning or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

See original blog: ARQ | Blog | Crystal Ball Gazing for the Year Ahead (yourarq.com)

About ARQ
ARQ provides a bespoke white-label platform for private banks, wealth managers and financial advisors to interact with their clients, with the aim of enabling them to increase the wealth of their clients. To achieve this they have created a digital interface which aggregates client wealth in one place and uses a financial performance analytics tool to access the health of investment portfolios. They can benchmark third party holdings to their client’s offering, highlighting weak performance by third party wealth managers which in turn drives AuM to their clients. They can also help increase AuM from the existing client base as well as increasing the speed and success rate of prospecting.

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