Investors are rethinking the role of bonds, technology and ESG after a chaotic year

Photographer: Michael Nagle / Bloomberg

It’s been a year like no other.

Knocked by a unprecedented health crisis, global stocks collapsed in a urine market at recorded a record speed, and then gathered at new highs due to a flood of central bank money. Bond yields have fallen to unexplored lows, and the world’s reserve currency has risen to record highs, then retreated to its lowest level in two years as 2020 draws to a close.

Global asset allocators from BlackRock Inc. at JPMorgan Asset Management presented their shares for investors in the volatile year. Here are some of their reflections:

Rethink the role of bonds in portfolios

The massive stimulus from global decision-makers when markets were confiscated in March led to a breakdown of what has long been a negative correlation between stocks and bonds. The 10-year US Treasury yield rose from 0.3% to 1% in one week, and at the same time stock markets continued to decline.

Now, as investors face lower rates for a longer period of time, even as growth returns, doubts arise as to whether government bonds in the developed market can continue to provide both protection and diversification. and fed-up investors looking for income gains. There is also a the debate on the traditional investment policy of putting 60% of funds into equities and 40% into bonds, even though the strategy proved to be resilient during the year.

“We expect a more active fiscal stimulus than any other modern period in history in the next business cycle as monetary and fiscal policy align,” said Peter Malone, portfolio manager at JPMorgan Asset. many-London’s asset solutions team. “Future returns on a simple, static portfolio of equity bonds are likely to be restricted.”

A few giants on Wall Street recommends that investors take a pro-risk stance to adapt to the changing role of bonds. Among them, the BlackRock Investment Institute advised investors to resort to high-yield shares and bonds, according to a note released in early December.

“Don’t fight the Fed”

Few would have expected a rapid change in the markets we saw in 2020. As Covid-19 spread, the S&P 500 fell 30%. in just four weeks at the beginning of the year, a much faster fall than the median of a year and a half it had taken to reach the last level in previous markets.

Then, as governments and central banks backed up liquidity savings, stock prices returned at an equally astonishing pace. In about two weeks, the US benchmark rose 20% from the March 23 low.

“Normally, you have more time to position your portfolio in a correction,” said Mumbai-based Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life AMC Ltd. rally and it would have been difficult to catch up. “

Being a little contrary helps, Patil said, adding that it is better for investors not to receive too much call to stay on the money. He should also focus on a bottom-up portfolio so that he can cycle both up and down, he said.

SooHai Lim, head of Asia Equities, ex-China at Barings, said the rapid market recovery proved the soundness of the old saying “Don’t fight the Fed”.

That being said, some fund managers have warned that investors should not take quick support from central banks as collateral.

“It was a currency move from where it left off and if they intervened early enough,” said John Roe, chief many-asset funds at Legal & General Investment Management in London. “The disadvantage could have been unprecedented.”

Teflon Tech

This year’s dizzying rally of technology stocks gave investors a chance at a lifetime. Anyone who has missed this topic, which has benefited greatly from the trends of staying at home and digitizing in the pandemic, would most likely find their remaining reference portfolios. The top ten U.S. companies that contributed the most earnings to the S&P 500 Index this year are all technology-related stocks, from cloud computing pioneer Amazon.com Inc to chip maker NVIDIA Corp.

It’s all technical

These shares contributed the most to this year’s S&P 500 earnings

Bloomberg

Even with a short break in November, when the results of positive tests of a Covid-19 vaccine stimulated a rotation in cyclical weights behind, the technology ended as the best performing sector in Asia and Europe. Adherents of the value strategy have seen several false starts during the year, as investors bet that the stock group, defined by cheapness and largely comprising names sensitive to business cycles, will finally have its day. They were disappointed.

“Never underestimate the impact of technology,” said Alan Wang, portfolio manager at Principal Global Investors in Hong Kong. Due to the cheap costs of loans, “a lot of new technologies have been re-evaluated and this (pandemic) has just created a great opportunity for them to reinvent our lives.”

Innovative stocks are now valued on intangible factors such as goodwill and intellectual property, rather than on traditional methods such as price-to-earnings ratios, Wang said, adding that investors should adopt such valuation strategies.

Cash is king for companies

The pandemic and the speed with which it escaped the markets have shown investors that they should stay with companies with strong balance sheets that can travel in the waves of uncertain times.

“The resilience of equities in a year like this helps demonstrate their value and justify their higher valuation multiples in a low-interest world,” said Tony DeSpirito, chief investment officer of US core capital at BlackRock.

2020 reaffirmed two important DeSpirito lessons learned over the years: investors should conduct stress tests on companies to see if their companies’ revenues and balance sheets are strong enough to survive recessions in normal times; and should diversify investment risks and also increase sources of alpha potential.

Beware of collateral damage