Three Investment lessons from the year that changed the world

17 March 2021

10 minute read

The coronavirus lockdown has allowed some of us to learn many new skills, but there are even more useful things we can learn from the way global markets have behaved over the past year. Here, we share what we believe are three important takeaways from the crisis so far.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • Lesson 1: What will the world look like after the pandemic?
  • Lesson 2: Inflation?
  • Lesson 3: Three simple statements about investing.

The coronavirus lockdown has allowed some of us to learn many new skills, from begging Alexa to explain fronted adverbials to our children to trying to remove that cat filter from our Zoom profile. But there are even more useful things we can learn from the way global markets have behaved over the past year. With lockdown restrictions again starting to ease around the world, we share what we believe are three important takeaways from the crisis so far.

Lesson 1: What will the world look like after the pandemic?

Much of the market debate centres around what the world looks like when this latest coronavirus, and its various emerging variants, is in meaningful retreat. Many downturns and the later recoveries are informed by a tangled relationship between unemployment expectations and household savings. As the economy deteriorates and labour markets wobble, people tend to respond by squirreling away more of their income for the now apparently imminent rainy day. The resulting build-up in savings actually worsens the situation by reinforcing the contraction in demand – the so-called ‘paradox of thrift’. In turn, this feeds back into higher unemployment, more savings and so on. This painful spiral can end when households feel they have sufficient reserves built up relative to their interpretation of their employment prospects. This is, of course, a generalisation. The term ‘recession’ is much less usefully descriptive than many seem to need it to be.

Nonetheless, this crisis has seen savings build up at a record pace in many countries, to a historic degree. There are certainly precautionary aspects to this build up – in the UK as elsewhere, the furlough scheme is surely concealing a more unsettling jobs outlook than the headline statistics currently suggest. However, there are several more unique features of the last year that also inform this debate. Efforts to contain the spread of the virus, alongside changes in consumer risk appetite, has severely restrained opportunities to spend. What economists called ‘social spending’ remains on the floor in many countries as a result. Another rare feature of this last year is the degree to which governments around the world have stepped in to mitigate the economic effects of the crisis. There is more coming imminently in the US too.

How and when this pent-up wave of saving is spent is one of the key questions for investors at the moment. Some are understandably preaching caution. Past pandemics have left lingering scars on our collective risk appetite, leaving consumers feeling the need to save more of their income. How those savings are distributed across the income brackets will also matter. The more of it that is concentrated amongst the already wealthy, the less of it we should expect to be spent. Lower earners not only have a lower propensity (and ability) to save but the shopping basket looks very different too. As you move up the income segments, spending tends to shift away from goods consumption towards services. The evolution of the labour market and the degree to which policymakers remain on the front foot are two other vital inputs into this story. As usual, the message here is to avoid those giving strident answers. These are unprecedented times (as normal). Corresponding macho bets on one particular vision of the future should be avoided too.

Lesson 2: Inflation?

Worries about the global economy overheating may seem remote in the context of the year just gone, however this debate follows on in some ways from the points made above. Incoming economic data are likely of very little use for now. Inflation data are noisy at the best of times, right now there is barely any meaningful signal at all.

In an analogy that would horrify most serious economists (and car enthusiasts), we might think of the global economy as a car. Like most cars, the global economy has an optimal speed. In the car, if we go too fast for too long, the engine will overheat and steam will erupt from the bonnet. If it goes too slow, it stalls. In this analogy, you can think of sharply rising prices or problematic inflation as the steam. It is potentially a signal that the economy is running beyond its potential. The stall corresponds to a recession. In a sense, central bankers have a measure of influence on the accelerator and brakes through their ability to affect interest rates. However, we should be wary of overstating this influence – central banks are just part of a complex web of forces driving and responding to interest rates. We should also remember that they have the same problem as everyone else – namely that the optimal speed of travel for the global economy is always changing, sometimes subtly, sometimes less so. The fact that this potential growth rate is also unobservable in real time further complicates our ability to see what the ‘right’ interest rate is. To flog the car analogy to its final death, it is like driving a car where the size and detail of the engine is constantly in flux.

The point of all of this is that the interaction between growth, inflation, interest rates, and stock market valuations is significantly more complex than many talking heads let on. This last year may well have changed the pace at which the economy can happily grow. The policy decisions of the next year could also have a significant influence. One of the many problems with making this judgement now is the outlook for the labour market around the world. We simply do not know to what degree the nature and number of jobs available has been changed by this pandemic and our response to it. To know this, we need a better idea of what our lives will look like when we have this latest coronavirus in meaningful retreat.

We have long been wary of the idea that the recent past contains all the information we need to predict the investment winners of the future. The socio-political, macro-economic, regulatory and other contributing influences to one period rarely remain stationary for long. The capital markets winner and loser board changes, sometimes suddenly and most unpredictably, as a result – the opening exchanges of 2021 pay perfect testament. This is why we devote so much of our time and resource to mathematically imagining hundreds of thousands of viable futures and finding the mix of assets that sits most robustly in amongst them. This process does sample from the past of course, but is careful not to overstate the signal you can get from the last decade. As with above, those that would offer a compelling singular vision of what is to come in the months and years ahead, as well as the perfect investment(s) to profit, should be ignored.

Lesson 3: Three simple statements about investing

The reality is that little of the daily torrent of newsflow means anything for those focused on using diversified exposure to capital markets assets to try and hit their medium term financial goals. It may not feel like much of a thrill, but simply maximising your time in the market is the only logical conclusion from three statements/admissions.

First, of course, we cannot know the detail of what is going to happen next week, or beyond. There are plenty of investment quacks who will argue differently – they should be ignored.

Second, market prices reasonably accurately reflect all that we collectively think we know, fear, and hope about that future. Opportunities to disagree with the range and weighting of the future paths implied by these prices are few and far between. Again, be careful of those regularly offering ‘strong conviction’. More often than not, such conviction should be seen as a cry for marketing attention in a world in thrall to a catchy headline or slogan. If the conviction is less superficial, then a lack of investigation or understanding is likely to blame. In this framework, the popular strategy of waiting for a pullback is simply wasting time. A move lower in share prices, for example, simply reflects the incorporation of new information – you are buying a subtly different item, not the same one at a discounted price.

Third, and this is perhaps the most complicated assertion, is that humankind will continue to invent new stuff and get better at using it. This is productivity, the driving force of the dramatic changes in living standards over the last three centuries, the engine of economic growth and everything when it comes to future portfolio returns. There can be no guarantee that our species will continue to invent new and amazing technologies or indeed that we will learn how to adapt them to drive future profits growth. However, a careful study of history gives us reasonable cause for optimism.

So, these three short paragraphs are in reality all you need to read each week if you are wondering when and how to invest. The answer is always now, because that simply gives the most minutes, hours, months, and years of exposure to the future potential innovative breakthroughs. We don’t know when or where they will be – How can we?! Therefore, we should be diversified globally. There are some opportunities to add value here and there, but these should be pursued selectively and by professionals with that job as their sole aim.

From a more topical perspective, the surge in Bitcoin does potentially provide interesting context/challenge to two of these points. The mostly economically illiterate arguments that bolster at least some of the crypto currency’s dizzying rise may prompt some to question point 2 above – the concept that markets are relatively efficient. There is something in that. There are periods where emotion, hype, and other impediments to cool calculation can get in the way. However, we would argue that the gravitational pull of intrinsic value is inescapable over time. That intrinsic value is very hard to locate for Bitcoin given the absence of coupons, dividends or cash flows. However, the surrounding hysteria and evangelical tilt to some of the supporting arguments should be setting off alarm bells for the hard-nosed realists out there.

However, the other more interesting side to Bitcoin is the technology that underpins it. Blockchain and the way that it works to eliminate the need for trust has widespread, as yet untapped, uses in the wider economy. In the funkier role plays, one effect that this technology could have is to decimate costs of operating across borders or transactions more generally1. Such costs have long been seen as an important reason for the rise of the multinational mega corporation as the dominant structure for enterprise2. Perhaps the time could come for a new corporate structure to emerge – one that best makes use of the prevailing array of technological breakthroughs. Diversification and humility are the familiar lessons here.

More broadly, we should remember that trends in productivity do not travel in a straight line. New technology is not always immediately assimilated into the wider economy; it often takes companies and consumers decades to work out how best to use it. Around 130 years ago, US factories started switching from steam power to electric power; however, productivity gains disappointed expectations for several decades after the switch. It took the next generation of factory owners to redesign manufacturing processes around this more flexible power source for the gains in productivity to be more effectively reaped3. The same is true now. Much of today’s global workforce grew up in a world where computers were a rarity and experts were figures of fun. It seems unnecessarily pessimistic to start betting that there is no more juice to be squeezed out of the invention of the computer, for example, just as the workforce shifts towards a generation that has been immersed in this general purpose technology from birth.

Do not despair, don’t pay too much attention to daily news and get invested in a diversified mix of capital markets assets as soon as you can with what you can afford. Rational optimism about the future is one thing, blind faith is another.

Where to invest

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection?

Alternatively, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ. Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently. Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Plan & Invest is a new service which creates and manages a personalised Investment Plan just for you. Whether your long-term goal is your child’s university education, retirement or just building a nest egg, all you have to do is tell us a bit about yourself and then, if your application is successful and you’re ready to invest, let our experts select and manage your investments (minimum investment is £5000).

Read the Assessment of Value report [PDF, 683KB] for funds run by Barclays.

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