Significant opportunities ahead for wealth advisers and their clients

David Amaryan, Balchug Capital

By David Amaryan (pictured), Founder of Balchug Capital – The global Covid-19 pandemic cast a long shadow over 2020. But now 2021 promises to be a year of opportunities. Mass vaccinations, unprecedented fiscal and monetary stimuli, and record low interest rates – these and other factors all create an exceptionally hospitable environment for markets to thrive and will create significant investment opportunities for wealth advisers and their clients to exploit.

The losers of 2020 will be the winners of 2021 – and vice versa. These shifting fortunes should be highly conducive to a positive performance of recovery stocks in industries such as travel, hospitality, and retail, which remain significantly below their fair values, despite already having recovered well from their March 2020 lows. There is a chance of a correction in the first half of the year, driven by a rotation out of the high valuation tech sector, which has a significant weight in the indices. But in our opinion this correction will not be deep and we will end the year higher.

Equities should outperform bonds and the rotation from growth to value should continue in 2021. In fact, one of the pre-pandemic trends in which we are seeing signs of a reversal is the dominance of growth stocks in recent decades. This could be the era of value stocks, which could last 5-10 years and would align well with expectations of outperformance from the aforementioned recovery stocks. Other value sectors expected to do well include energy, financials, industrials, natural resources, and real estate. 

A pre-existing trend greatly accelerated by the pandemic is sustainability. One area of particular interest for 2021 is renewable energy, which is expected to continue outperforming. Sustainability is not an over-hyped temporary fad, but the beginning of a new era, the magnitude of which has not yet been fully understood, nor priced in, by the market. There was a time when very few could imagine that a website could one day be worth 7 times more than Exxon, or that the top 5 US companies by market cap would be tech companies, or more recently, that Tesla would be among them. The energy transition is going to happen and and electric vehicles will be at the forefront of that.

A new trend, and another technology of tomorrow, which investors should pay close attention to is biotechnology. The pandemic has offered a strong reminder that for all our technological advancements, our societies and economies remain only as resilient as the people within them. In particular, immunology and gene therapy can be expected to see continued growth post-pandemic, along with historic breakthroughs and continued consolidation in the space. 

In recent years, developed markets outperformed emerging markets by a significant margin and passive index funds beat the majority of actively managed funds. In 2021 and beyond however, we believe that this trend will reverse. In order to earn double digit returns, investors need to re-evaluate their asset allocation and move away from crowded regions and trades, into new countries, sectors, and ideas. Digging deeper into specific situations will prove to be a more profitable and effective way to invest over the course of the next decade and we will see funds flowing back to active managers. The recent market volatility has underlined the case for active management and in emerging markets the rationale is particularly compelling. 

Among emerging markets, Russia looks especially attractive and we are optimistic that it will outperform emerging markets more broadly in 2021. It is safer and more predictable than other emerging markets and, as the world recovers from COVID-19, it is worth noting that Russia is ahead of the curve in vaccinating its population. Russian equities are broadly undervalued, with P/E ratios of 8.7 compared with 15.6 for the MSCI EM index, and dividend yields are the highest in the world at 6.2 per cent. Russia has been largely ignored by the international investment community since 2014, for geopolitical reasons. As such, overlooked and underinvested, the Russian market effectively offers a built-in political call option free of charge. With Joe Biden in the White House there does remain uncertainty about America’s policy towards Russia but the Russian market still offers one of the best risk/return profiles in emerging markets.

Of course, as the late Ian Wilson, former Chairman of GE, once said: “No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.”

And therefore what ultimately matters in terms of investment decisions is the ability to continually analyse data, to respond swiftly to rapidly changing circumstances and to take advantage of opportunities as they arise. 

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