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2021 – a new normal?

How has 2020 prepared us for the year ahead?

17 December 2020

Our Chief Investment Officer talks about a most unusual 12 months and what we can expect from the year ahead.

The current landscape

2020 has been a challenging year. Aside from the obvious human cost, there's been substantial economic disruption. However, the response from policymakers has been significant and has helped to support the global economy through the uncertainty.

We believe that investors today can be broadly classified into two distinct groups. On the one hand, there are those who believe that the next decade will be much like the last and do not expect much in the way of growth and inflation for the foreseeable future. For the others however, the policy response to this pandemic has changed the economic outlook and inflation is likely to become more of a threat going forward.
Meanwhile, high vaccine efficacy rates suggest we could be seeing some form of return to economic normality by mid-to-late summer 2021. However, we do not expect it to be the old normal. The underlying economy has changed. At the same time, there have also been changes to our behaviours, our shopping habits, and our daily lifestyles. What the future holds no one can know for sure.

As ever, we recommend investors get invested, stay invested and stay diversified.

2021 – a new normal?

As part of our aim to keep clients informed of our current investment views and how these themes are impacting your discretionary portfolios, Phil Attreed, Head of Investment Consulting, talks to Will Hobbs, Chief Investment Officer, about a most unusual 12 months and what we can expect from the year ahead.

Hello and welcome to the final edition of Monthly Market Insights for what has been a frankly truly extraordinary 2020. This time, Will Hobbs, our Chief Investment Officer, and myself will try to briefly and almost certainly somewhat prematurely call time on 2020 and look forward to what comes next year. So Will, it's not a trick question: how would you recap 2020 in a couple of sentences?

Yes, it's not easy, Phil. I think the first thing to point out is that it's been a tragic year. So years of deaths have been brought forward, something we're all aware of, but aside from the directly human cost, there's been unbelievable economic disruption. The ILO, the international labour organisation, estimated that around 80% of the world's workforce back at the end of April was in some kind of disrupted or worse relationship with their employer. You had around 1.4 billion young people furloughed from education so the disruption has been enormous. But I think for investors, the fact that policymakers responded with similar scale in a way relative to those problems that they responded so forcefully that has been in many ways the dominant thing to think about this year. That policymaker response particularly in the context of a market, amongst many investors, you and I know, going into this recession, the feeling was that policymakers were out of bullets, so to speak, that they wouldn't have any room to do anything when the next crisis came. And that has been for a number of reasons been proved substantially wrong and that in a way has been one of the big stories of this year.

Right. And the incredible degree of support that you mentioned is important in how we, as investors, should really be thinking about the outlook for 2021. Is that right?

In some ways it's kind of interesting because right now and this is a bit of a generalisation as usual, but you can broadly classify investors into two big camps at the moment: the first camp are those who believe that the next decade will be much like the last, that you won't see much in the way of growth and inflation and therefore you see just a continuation that this recession almost accelerates some of that in a way that the trend towards the world ending up like Japan economically. For investments on that you keep very much the same toolkit as you had before, you think about growth stocks, gold, government bonds are less of a place but probably still some place in that world. The other camp are those that believe that this pandemic and more specifically to your point the response to this pandemic from policymakers has likely changed the outlook: that inflation is likely more of a threat going forward in the context of that policy response among many other things and that the world could be quite different in the decade ahead. The investment toolkit you need to meet that world looks quite different. But to be honest because some of the trends we've been seeing recently: the performance of so-called value companies, broader commodities, some of those things would prosper in another world and certainly those government bonds and so on would not be such a good defence in those ones. So this is really a moment in history. I think we'll look back from a couple of years hence and maybe see one thing or other or maybe neither. But I think the point from us is a familiar one, which is that you can't just bet all of your, put all of your eggs in one basket on one vision of the future because this crisis and the response to this crisis really have been something quite different.

Quite. But I suppose in the shorter term, how long in your view, and in the team's view, should we as investors really expect, before some of these vaccination programs that we've seen in the press in recent weeks, how long will they take to return us to some semblance of normality?

This is where I guess the high efficacy rates that we're seeing from some of these vaccines are quite helpful because that means essentially you need to vaccinate less of the population to get to that fabled herd immunity level. So obviously there are a number of things that go into this in terms of take up acceptance and an absence of major distribution slip ups but most sober voices seem to be saying that mid-to-late summer is a plausible time when you could be reaching that herd immunity and therefore return to some form of economic normality. But I think the point here we have to make is that it won't be the old normal. Underneath, while we've been locked away and distancing and so on, the underlying economy has changed. The world has taken this digital leap forward, we've talked about that before, but there have been many other changes besides these events, changes to our behaviours, our shopping habits, our daily lifestyles. Some may persist and as you know, we're wary of those who would be over confidently predicting what that future like looks like. Rob Smith always talks about the Dunning–Kruger effect where your skill is directly inversely proportionate to your confidence or your confidence is directly inversely proportionate to your skill in this area. The louder and more noisy and more authoritative you are, the less you should be trusted. So again I think we'd urge investors to keep an open mind and that's really what our Strategic Asset Allocation and how we do that is all about.

That leads me quite nicely on to the next question. As investors, you've talked about how the vaccines, the introduction of vaccines is almost an invitation for us to invest in a globally diversified portfolio or a fund. I get that but maybe you could unpack maybe the link a little bit more clearly?

So Phil, this is the direct link between innovation and profits growth and shareholder returns basically. I can illustrate it a number of ways but my favourite example I guess is the humble shipping container. The interesting thing here is that back when it was first brought in You think about what preceded that. It was crates of uneven size that had to be packed and unpacked individually. Now the introduction of crates, all of identical size easily, security was better and so, on all of them able to be offloaded and unloaded lorries and trains so on. Well there are estimations that this reduced costs associated with container shipping directly in terms of labour costs, insurance, theft, and breakage costs by 49-fold so an enormous - sorry no 39-fold - per ton of cargo, so an enormous saving. It also was seen to proliferate trade or expand trade between countries with ports eightfold. So there was just huge effects from this very simple sounding innovation. So and what that meant was that there was more growth and it was more widely spread, so all companies that were in the various areas all benefited from that and shareholders in those companies benefited because there was more corporate profits. Now in this situation, if you think about it, your vaccine can do two things: one which is a little bit more of a leap of faith I guess is that you could argue or some are arguing at the moment that actually the cost benefits of investment in healthcare and vaccines has dramatically changed in the aftermath of this crisis. The costs of not having vaccines and advanced or more advanced healthcare have become much more apparent. So investment in that area becomes much more attractive and that could potentially increase life expectancies over time, some are actually forecasting that quite plausibly in my opinion, that you could have and see a scenario where actually now we see life's expectancies regain some momentum in the aftermath of this crisis. The second more tangible point I think is that it alludes to the existence of innovation. When people talk about "we've ceased to innovate meaningfully", that's just not necessarily true and I think this, the incredible race for a vaccine shows that where accumulated scientific knowledge is met with the right incentives, there's amazing things that can be achieved in a very short space of time and that's going to be necessary as we know. The planet has daunting challenges ahead but I think this does illustrate that actually in the right incentive structure that we have we are capable of achieving extraordinary things in a very short space of time. Absolutely, still lots of very interesting things out there in the future for us to get invested in and to profit from.

So finally last point. In the coming days we'll be recording some thoughts from the wider team on the outlook for 2021 and obviously sharing those with clients, listeners, and viewers. Any teasers there for us in terms of what we might look forward to from the team?

Yes, I mean, they'll be far less of a buzz kill about it than I am obviously because all I would tend to say is that the future is unknowable and we can't even have a guess at it. But you can and the guys who are on will do a much better job than I am. So JP will bring his usual allocation lens to it and looking at some of the various paths ahead and how they are priced in terms of capital markets, so where you could have advantage from leaning. Rob Smith obviously it's been a - I think in all the years that you could have had to be watching from a behavioural vantage point, this would be one of the greatest in a way from market behaviour to even just consumer behaviour - so he'll have more than enough to cover in that outlook. And then we've got Ian Aylward as well who obviously gives us a little bit more on the responsible investing side. With what we have seen this year, as you know, is a significant increase in interest in this area of investments and he's in charge of our responsible investing, both accessing it fund but also more importantly some of the ways that we go about doing it and embedding it in the way that we work here at Barclays, as you know. Fantastic and of course they'll be released through our usual Word on the Street podcast.

Thanks as always, Will, useful insight to get us through to the end of the year and that just leaves me to thank you, our viewers, for joining us throughout 2020 and to wish you and your families a very safe and hopefully enjoyable festive period whatever that does entail. If you would like to hear more from us before the next Monthly Market Insights, in particular with regards to the Brexit timetable news that might evolve and break there please do seek out our views through that weekly Word on the Street podcast. Otherwise we look forward to welcoming you back next year, hopefully a very different 2021 ahead. 

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