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By Franklin Templeton
Rife with risk and opportunity, 2020 was a year that will be entrenched in the memories of investors for decades to come. The overarching market narrative was dominated by the still ongoing coronavirus pandemic. Stricken with anxiety, the markets were drained of liquidity and hit rock bottom towards the end of Q1 2020. However, hope, in the form of globally coordinated central bank measures, quickly ignited risk assets around the world.
Emerging Markets (EM) beat Developed Markets with a head scratching 18.3% return. Most of the outperformance was driven by Health Care and Technology in China and Korea. Selective EM consumer names also soared in tandem with the world’s changing consumption patterns. In the US, Technology and Consumer Discretionary were once again the top performing sectors. Style-wise, US growth beat US value by almost 37% over 2020!
US Investment Grade Bonds was the first fixed income asset class to show resilience in the face of Covid-19. Backed by the US Fed, investors never lost confidence in the asset class which returned over 11% in 2020. In contrast, High Yield bonds returned just 4.7%. EM and Asian local bonds too, had a good year as the search for yield increased demand while local currencies gained against the US dollar.
The greenback lost significant ground against major trading partners towards the end of 2020. Investors eventually accepted that the risk rally was in full swing while the political, fiscal, and monetary circumstances of the US all pointed to a weaker dollar. A relatively stronger Chinese economy and a Brexit resolution also worked against the dollar.
Copper and Gold ended 2020 as the best performing assets with a return of more than 24% each. Gold benefited from the global malaise while copper rose on resumption of economic activity and the push towards copper intensive, greener energy. Oil, on the other hand, fell by more than 20% as supply exceeded demand despite fa number of oil cuts by the OPEC Plus group.
Chart 1: Returns from major asset classes were mostly positive (% Returns in USD)
Source: Bloomberg. Data as of 31 December 2020. Returns in USD. Indexes are unmanaged, and one cannot invest directly in an index. Refer to the notes for index information.
Zeroing In: Concentration Concern
In spite of commentary that the U.S. market is too concentrated, you see below that the US is not an outlier. The top five companies often make up a large share of the market cap in global indices with the equity markets of Korea, China, and Japan as clear examples.
Chart 2: The concentration of top 5 companies (market cap) in the US are nowhere near that of Korea, China, and Germany. (% of Index)
Source: Bloomberg, Standard and Poor’s, MSCI. Data as of 31 December 2020. Market Cap in USD. Indexes are unmanaged, and one cannot invest directly in an index.
What we have witnessed in the US is a historic run for growth styled companies which surpassed that of the dot com era. This dynamic has led to the outperformance and enlargement of the Technology and Consumer Discretionary sectors relative to Financials and Industrials.
However, although large tech and consumer discretionary is trading at a large premium to the market, past bubbles in 1972 and 2000 have seen more inflated relative valuations. From an earnings perspective, the five largest stocks, which happen to be tech related, are expected to account for 15% of S&P 500’s 2021 earnings, while the Technology sector has utilized its strong balance sheets to a tune of over 75% of buybacks year to date as of 30 September 2020. The current situation is unlike the dot-com era of lofty valuations and negative earnings.
The Bottom Line
Vaccine rollouts and the gradual re-opening of economies have investors cautiously optimistic entering into 2021. However, an uneven global recovery and geopolitical unease coupled with the risk of reflation and heightened valuations suggests lingering market uncertainty. What is not uncertain is the growing role of technology in the way we live, play and work. Therefore, it is no coincidence that the sector has swelled not just in the U.S. but globally, beyond the bellwethers of yesteryear’s economy.
