Even though markets have recovered since the crash in February 2020, they have held plenty of surprises for investors.
- Fiscal and monetary stimulus have been more influential than economic data
- China looks set to become the world’s largest economy a full five years earlier than it might otherwise have done
- Markets have clung to the most obvious winners, overlooking many companies that have managed well through the crisis
It is 12 months on from the near-30% stock market plunge that marked the start of the pandemic. That was the point at which investors realised that Covid-19 would not bypass the Western world as SARS or MERS had done before, but at that point few would realise the momentous impact it would have on economies, livelihoods and financial markets.
If anything, financial markets have been surprisingly resilient since then, suggesting that fiscal and monetary stimulus are far more influential than economic data – at least in the short-term. Investors that kept faith have been rewarded. That said, financial markets since then have shown a number of surprising characteristics.
While it was perhaps possible to predict the outperformance of technology, giving the wholesale move to homeworking and digital solutions, the outperformance of Japan and Asia was less predictable. If anything, in February last year Asia looked likely to suffer the greatest impact. That has turned on its head since: China looks set to become the world’s largest economy a full five years earlier than it might otherwise have done, according to the Centre for Economics and Business Research (CEBR).
The weakness of the usual defensive blue-chips was also a notable characteristic of the post-crash world. Those investors who thought buying large cap, well-established companies would defend their portfolios against the ravages of the pandemic were mistaken. The pandemic took no prisoners. If companies were in the wrong sector, they were savaged. Some of these unloved sectors may have bounced back since the vaccine announcements in November, but for investors it was a salutary reminder to look forward rather than back.
Another characteristic of the markets since that fateful February has been its lack of imagination. Perhaps this can be attributed to fear in uncertain times, but markets have clung to the most obvious winners and overlooked many companies that were managing well and where valuations were far more compelling, particularly among smaller companies. This has created real opportunities, but only for those with a little bravery.
It appears now that November was an inflection point in markets and stocks with different characteristics have started to outperform as investors anticipate recovery. The next question may be whether inflation will revive, reversing a near-40 year trend of stable prices. 2020 has been a valuable lesson in being prepared for anything.
