Monthly Market Outlook

2021: A new cycle of economic growth and renaissance 

January 2021 (Click here to download)

A new year dawns with a heightened need for a fresh start. With 2020 now firmly behind us, we can approach this year with renewed hope and a desire to seek new and exciting opportunities. Caution will need to be exercised, but there is much to feel positive about.

Here is what we can expect from an economy on the turn, and how that will influence the Manager’s investment decisions this year.

Equities may remain expensive, but opportunities do exist

There is a consensus that company earnings will start to recover this year, returning to pre-Covid levels by 2022. That could mean that equities will continue to look expensive relative to their own history, which makes finding good entry points to generate future returns more difficult. The Manager still believes there are good opportunities out there though and the ongoing and rigorous analysis of its specialist teams will enable it to move quickly as these prospects present themselves. The Manager is also confident that its current holdings are well positioned to continue generating decent returns from this asset class.

Narrowing credit spreads signal a resurgent global economy

When investors are nervous about the economy, they prefer the relative safety of government bonds over corporate bonds since there is an increased risk that a company defaults and doesn’t return on its promise. The price of government bonds therefore increases and their yields (the amount of return promised) fall. At the same time, the price of corporate bonds decreases as they become less desirable, and the anticipated return goes up to entice investors. This results in a widening of the credit spread, which is what happened at the height of the Covid-19 crisis.

However, towards the end of 2020, credit spreads narrowed rapidly, signifying a return to confidence, and the Manager expects this trend to continue into 2021. Government bonds are yielding practically nothing, and investors are being forced to buy higher yield bonds to secure decent future returns. As these spreads narrow further, investors will need to take even more risk in pursuit of yield.

Commercial property remains important, despite office and retail sector woes

Investing in commercial property has always played an important part in a balanced portfolio since it offers a predictable income (rent) that rises with inflation. But the Covid crisis has found property investors grappling with a sudden decline in demand for retail parks and office space, as well as an accelerated change in land use. The Manager will continue to access the opportunity in property through real estate investment trusts (REITs), which means it is purchasing listed companies that invest in property rather than the properties themselves. This improves liquidity and means it can focus on companies that specialise in sectors of the market that will continue to benefit from the pandemic such as distribution centres, cell-phone towers and data centres.

“It would be naive to suggest that the effects of the global pandemic are in the past. But with a portfolio of vaccines on the horizon, there is light at the end of the tunnel, and from an investor’s perspective that means a return to economic growth and business opportunity.”

Philip Smeaton
Chief Investment Officer

Diversification and inflation-proofing is crucial when managing risk

Gold can be a volatile asset and this has been evident in recent weeks. But inflation remains a key risk to future returns, and gold offers some protection from that. It also doesn’t have any credit risk associated with it, which counterbalances the extra credit risk the Manager has had to take in other parts of the portfolio. To ensure portfolios are fully diversified, it will also focus on absolute-return funds and infrastructure trusts which can perform in a wide variety of market conditions. Since government spending is likely to increase, infrastructure projects can also generate yield and protect against inflation.

Investment view: Five post-Covid economic trends to watch out for.

With change, comes opportunity. Here are some of the key trends the Manager is watching closely as they give rise to longer-term growth opportunities.

Source: Sanlam Private Wealth

Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd.

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by Sanlam. Any expressions of opinion are subject to change without notice.

Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

This document is intended for use by professional financial advisers only. The distribution of VAM Funds and the offering of the shares may be restricted in certain jurisdictions. Private investors should contact their financial adviser for more details on any of the products featured. It is the responsibility of any person in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdictions. Prospective applicants for shares should inform themselves as to the legal requirements and consequences of applying for, holding and disposing of shares and any applicable exchange control regulations and taxes in the countries of their respective citizenship, residence or domicile. Click for Important Information