Glitzy tech stocks have hogged the limelight during 2020’s astonishing market rebound. Now it could be time for dowdier areas of the equity market to shine as vaccines make a return to normal in 2021 increasingly likely. That’s good news for UK, European and emerging market equities.
With the MSCI World up over 12% for the year to date it might appear that markets have already recovered from their March lows.[1] In fact, a lot of the recovery so far has been led by the US and China, specifically by a relatively concentrated coterie of tech, healthcare and consumer staples. There is still plenty to play for in the wider markets.
Investors have been focusing on the ‘working from home trade’: underweight equities, overweight US equities, underweight the UK. In the process, buy tech, healthcare and consumer staples – and some gold, just in case.
As a result, swathes of the world’s equity markets have been mothballed. Europe has not fared too badly but the tech-light UK, with its roster of miners, banks and engineers has lagged far behind the pack.
It is now increasingly likely that much of the world will be returning to work in 2021. In this regard, the development of vaccines that can be stored in a regular fridge rather than requiring super-cooling is particularly good news for everyone – not just richer countries. There is a lot to look forward to as economies re-normalise, stimulus programmes take effect and a new US president brings a less adversarial approach at home and abroad.
The end of a trend
US tech was a star performer in 2019 and much of 2020. During this time we were well exposed to the sector through the LF Canlife North American Fund and a supplementary ETF position in the NASDAQ.
We began to sell our NASDAQ position into strength in the third quarter of 2020 as it became clear that large-cap US tech valuations were becoming stretched and better opportunities lay in taking more selective positions in US tech and the broader US market.
At the same time, as the news around vaccines became more positive, we began to consider how to redeploy our NASDAQ gains and position our portfolios for global re-normalisation.
One door closes and another opens
To some extent, positioning for re-normalisation involves taking an opposite stance to the working from home trade. We have moved to overweight equities and, within that, we are currently overweight UK and underweight US equities. However, the UK looks particularly promising at this stage of the recovery process.
The UK equity market looks primed for a rebound, being home to a range of stocks that will benefit from any pickup in global economic activity and which appear undervalued relative to other equity markets, Europe included. The UK also has a strong lead in having vaccines available for use, which could speed re-normalisation in 2021, while the increasing likelihood of some form of Brexit deal being hammered out will remove years of uncertainty and a key deterrent to international investors.
As part of this repositioning we have substantially reduced exposure to the NASDAQ across our LF Canlife Portfolio Funds range and in the LF Canlife Balanced Fund, and increased our UK exposure via the LF Canlife UK Equity Income and UK Equity funds.
Europe also offers good recovery potential, most specifically in its industrial sectors. We have recently increased exposure to European industrial goods and automobiles in the LF Canlife Balanced, Managed 20%-60%, and Portfolio Funds via sector ETFs, which provide liquid and well-diversified access to these specific areas of the European market.
In the LF Canlife Balanced Fund, which has the most flexible investment remit of our multi-asset funds, we have also boosted exposure to emerging market equities, alongside an increase in UK and European equities.
Emerging markets (excluding China) have been shunned by most investors throughout the pandemic and are now trading at historically low valuations. They have the potential to rebound quickly and their long-term growth potential is very promising, not least because most emerging market countries, unlike the developed world, have not racked up vast amounts of debt in their efforts to combat Covid-19.
Enjoy the moment – but stay diversified
We do not expect the re-normalisation of the world’s economies to be all plain sailing. For starters, implementing mass vaccination around the world is going to be a vast and expensive logistical exercise. However, things are looking up at last, and there is suddenly an air of optimism in the markets.
Like everyone else, we are enjoying the moment but as disciplined multi-asset investors we will (as ever) be sticking to our risk/return objectives, staying well diversified and taking a careful approach to any tactical opportunities.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
Due to the underlying assets held, the prices of the LF Canlife UK Equity Income Fund, LF Canlife UK Equity Fund and LF Canlife North American Fund are classed as having above average to high volatility.
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CLI01768
Expiry: 31/03/2021
[1] Source: MSCI, 07/12/2020