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Positioning ourselves for the opportunities of 2021

As we gear up for the end of 2020, the global outlook is a lot more positive than it was just a few weeks ago. While the Covid-19 situation in both the US and Europe is challenging, positive steps are being taken. Volatility is decreasing, a number of potential vaccines are emerging and the uncertainty surrounding the US elections is now largely behind us.

We are fairly sure that uncertainty will be high for a while yet. We do, however, believe that 2021 could see a rebound for the global economy. This is particularly the case for the sectors most affected by the pandemic. The timing and effectiveness of the vaccine will be key factors in the coming months – it seems that the most likely scenario is approval by the end of 2020 and full distribution in the first half of 2021.

It’s for this reason that we’ve cautiously increased the risk of our portfolios. We’ve done this by raising the equity allocation – valuations are still high but are supported by positive medium-long term expectations, monetary policy that should be accommodative and new fiscal stimulus on the horizon. The risk premiums in the stock market are still attractive and we look to take advantage to increase long-term expected returns.

A revival for value stocks

For our higher risk portfolios, we have increased our exposure to global equities. We’ve given a particular focus to parts of companies that have been most affected by the pandemic, which look set to take advantage of an improving landscape in the medium term.

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For this reason, we have reintroduced a factor ETF. A factor is a characteristic that an investment could have – for example, high growth or low volatility. We have introduced an ETF which captures a ‘value’ factor. ‘Value’ captures those equity investments that have low price-to-earnings multiples, i.e. their price is lower than others with a similar future earning potential.

Why are we doing this now? Value stocks are those which haven’t seen price increases recently and are perhaps underestimated. Recently, what we’ve seen is that high ‘growth’ stocks (tech companies, for example) have outperformed their ‘value’ counterparts (financial companies and more cyclical industries), particularly in the aftermath of Covid-19.

Up until now, we’ve happily had a growth tilt in the portfolios and reaped the benefits. However with recent events, as highlighted before, we see opportunities in 2021 for value. These areas that have previously struggled with muted or negative economic growth, we believe, will see a resurgence and make ground on their growth counterparts. With valuations much more attractive for these companies, we believe that these sectors stand to gain when the global economy slowly emerges from Covid-19.

Ultimately, our portfolios remain conservatively positioned. The risk increase has been designed with caution in mind and will be gradual, to protect your wealth without missing out on any potential opportunities.

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