The Big Picture: Boats afloat
Rife with risk and opportunity, 2020 was a year that will be entrenched in the memories of investors for decades to come. The overarching market narrative was dominated by the still ongoing coronavirus pandemic. Stricken with anxiety, the markets were drained of liquidity and hit rock bottom towards the end of Q1 2020. However, hope, in the form of globally coordinated central bank measures, quickly ignited risk assets around the world.
Emerging Markets (EM) beat Developed Markets with a head scratching 18.3% return. Most of the outperformance was driven by Health Care and Technology in China and Korea. Selective EM consumer names also soared in tandem with the world’s changing consumption patterns. In the U.S., Technology and Consumer Discretionary were once again the top performing sectors. Style-wise, US growth beat US value by almost 37% over 2020!
U.S. Investment Grade Bonds was the first fixed income asset class to show resilience in the face of COVID-19. Backed by the U.S. Fed, investors never lost confidence in the asset class which returned over 11% in 2020. In contrast, High Yield bonds returned just 4.7%. EM and Asian local bonds too, had a good year as the search for yield increased demand while local currencies gained against the US dollar.
The greenback lost significant ground against major trading partners towards the end of 2020. Investors eventually accepted that the risk rally was in full swing while the political, fiscal, and monetary circumstances of the U.S. all pointed to a weaker dollar. A relatively stronger Chinese economy and a Brexit resolution also worked against the dollar.
Copper and Gold ended 2020 as the best performing assets with a return of more than 24% each. Gold benefited from the global malaise while copper rose on resumption of economic activity and the push towards copper intensive, greener energy. Oil, on the other hand, fell by more than 20% as supply exceeded demand despite fa number of oil cuts by the OPEC Plus group.
Chart 1: Returns from major asset classes were mostly positive (% Returns in USD)
Source: Bloomberg. Data as of 31 December 2020. Returns in USD. Indexes are unmanaged, and one cannot invest directly in an index. Refer to the notes for index information.
Zeroing In: Concentration Concern
In spite of commentary that the U.S. market is too concentrated, you see below that the U.S. is not an outlier. The top 5 companies often make up a large share of the market cap in global indices with the equity markets of Korea, China, and Japan as clear examples.
Chart 2: The concentration of top 5 companies (market cap) in the US are nowhere near that of Korea, China, and Germany. (% of Index)
Source: Bloomberg, Standard and Poor’s, MSCI. Data as of 31 December 2020. Market Cap in USD. Indexes are unmanaged, and one cannot invest directly in an index.
What we have witnessed in the US is a historic run for growth styled companies which surpassed that of the dot com era. This dynamic has led to the outperformance and enlargement of the Technology and Consumer Discretionary sectors relative to Financials and Industrials.
However, although large tech and consumer discretionary is trading at a large premium to the market, past bubbles in 1972 and 2000 have seen more inflated relative valuations. From an earnings perspective, the five largest stocks, which happen to be tech related, are expected to account for 15% of S&P 500’s 2021 earnings, while the Technology sector has utilized its strong balance sheets to a tune of over 75% of buybacks year to date as of 30 September 2020. The current situation is unlike the dot-com era of lofty valuations and negative earnings.
The Bottom Line
Vaccine rollouts and the gradual re-opening of economies have investors cautiously optimistic entering into 2021. However, an uneven global recovery and geopolitical unease coupled with the risk of reflation and heightened valuations suggests lingering market uncertainty. What is not uncertain is the growing role of technology in the way we live, play and work. Therefore, it is no coincidence that the sector has swelled not just in the U.S. but globally, beyond the bellwethers of yesteryear’s economy.
Endnotes
-
Franklin Templeton, 8 January 2021. Data as of 31 December 2020 unless otherwise stated.
-
Gold refers to Generic 1st 'GC' Futures. Copper refers to Generic 1st 'HG' Futures. Oil refers to Generic 1st 'CO' Futures. Developed Markets Equity refers to MSCI Developed World Net Total Return USD Index. Emerging Markets Equity refers to the MSCI Emerging Net Total Return USD Index. Asia Pacific ex Japan Equity refers to MSCI AC Asia Pacific ex Japan Net Total Return USD Index. US Equity refers to the MSCI USA Net Total Return USD Index. US Investment Grade Bonds refer to the iBoxx USD Liquid Investment Grade Index. Asia Local Bonds refer to the Markit IBoxx ALBI. US High Yield refers to the iBoxx USD Liquid High Yield Index. EM Local Bonds refer to the J.P. Morgan Global Bond Index Emerging Markets Global Diversified IG 15%CAP. US Growth refers to the Russell 1000 Growth Index. US Value refers to the Russell 1000 Value Index.
-
OPEC refers to Iran, Iraq, Kuwait, United Arab Emirates (UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, Ecuador and Venezuela OPEC Plus includes all of OPEC plus Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
What Are the Risks?
This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it and does not constitute legal or tax advice. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this document and Franklin Templeton has not independently verified, validated, or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Any views expressed are the views of the portfolio manager as of the date of this document and do not constitute investment advice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein and reliance upon the comments opinions and analyses in the document is at the sole discretion of the user.
The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.
Products, services and information may not be available in all jurisdictions and may be offered by other Franklin Templeton affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so.
Copyright© 2020 Franklin Templeton. All rights reserved.