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In an uncertain 2021 where might the opportunities lie?

3 December 2020

After an unprecedented 2020, how might next year pan out and where might the opportunities lie? Darius McDermott, managing director, FundCalibre, considers three investment areas which he considers will prove interesting.

This article was first published in the December 2020 issue of Professional Paraplanner.

When many of us look back on 2020, it may simply be viewed as the year when everything changed: the way we worked, the way we educated, the way we socialised, and even the way we washed!

From an investment perspective, it has been one of – if not the most – challenging in my 25-year career in financial services.

At the start of 2020 we were undoubtedly cautious, given we were still enjoying the longest bull market in history and had been ‘late cycle’ for some three or four years. But while we were worrying about how an asset bubble might burst, it was another type of ‘bubble’ that would come to dominate the year. Covid-19 has undoubtedly given many of us a set of unique challenges to overcome.

The unprecedented nature of the virus also unsettled markets – to the point where there was a liquidity squeeze which resulted in the fastest sell-off in history, with global markets falling some 25% in a month. Even if a vaccine were to be discovered soon, it will take some time for the global economy to get back on its feet given the damage that’s been done.

So, as we enter 2021, it seems the path forward is uncertain, as it has been for some time. But there are some areas offering both refuge and opportunity to tackle these challenges.

Opportunities in Asia

A good example of this would be Asia, where we feel the strong response to Covid, particularly in Northern Asia, should set it in good stead for investors in the future. According to figures from the International Monetary Fund, Emerging and Developed Asia has a projected growth figure of 8% for 2021, well ahead of the 3.9% touted for advanced economies*.

While valuations in the region have looked more attractive in the past, we feel there are opportunities on a country-by-country basis. Good options to consider in this space include Fidelity Asia Pacific Opportunities and Matthews Pacific Tiger. The former is a high conviction fund, never investing in more than 35 stocks, while the latter is more diversified but with a tilt towards the growing middle classes and consumer in the region.

Opportunities in infrastructure

The second area is infrastructure. Put simply, it’s a great alternative for investors scouring the globe for income, while offering some security in a sense that the asset will always be needed and is an essential part of our everyday lives.

Fiscal stimulus may also provide a favourable tailwind for infrastructure, as governments increase spending in this area to revive the global economy. It’s already in the pipeline with the likes of Europe focusing on both green and digital infrastructure as part of its plans. A recent note I read points out that while Europe, China and Japan have used infrastructure as a key part of their recovery plan, the United States – arguably the place that needs it most – still has much work to do, giving scope for significant further upside**.

Options in this asset class include M&G Global Listed Infrastructure, which looks for a balance of growth and income from three key areas of the sector: economic, social and ‘evolving’ infrastructure. This means investments can include anything from utilities and toll roads to health to data centres, payment companies and royalties. Another option is First Sentier Global Listed Infrastructure, whose managers Peter Meany and Andrew Greenup invest in ‘hard’ infrastructure such as bridges and ports around the world, via listed companies that own the assets. Of around 120 companies that the team has identified and monitor, 40 are included in the portfolio.

Opportunities in European Smaller Companies

The final area caught the eye purely on valuations. One of my investment beliefs is that small and mid-caps outperform large-caps over the longer-term. Therefore, I was surprised to see some research from Credit Suisse, which shows European smaller companies are now trading at their cheapest level relative to large-caps since 2002. A principal reason for this is the benign economic conditions and central bank liquidity within markets, making all stocks more expensive. However, larger companies have been driven higher by structural headwinds and by herding from investors.

This is an example of an environment where a strong active manager can provide once in a generation type returns. Good options to consider would be the Jupiter European Smaller Companies, which was launched in February 2020 but is run by the highly experienced Mark Heslop, and T. Rowe Price European Smaller Companies Equity funds’, which is pan-European in nature and has been run by Ben Griffiths for almost five years.

*Source: International Monetary Fund – World Economic Outlook – October 2020

**Source: M&G – Three years in the pursuit of reliable long-term growth

***Source: Downing presentation – October 2020 – sourced from Credit Suisse Holt Data at 27 July 2020

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

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