Investors are rethinking the role of bonds, technology and ESG after a chaotic year

Photographer: Michael Nagle / Bloomberg

This has been a year like no other.

Hammered by one unprecedented health crisis, global stocks tumbled in a bear market record speed, and then to new highs thanks to a flow of money from the central bank. Bond yields fell to unknown lows and the world’s reserve currency soared to record highs, only to retreat to its weakest level in more than two years as 2020 draws to a close.

Global Asset Allocators from BlackRock Inc. to JPMorgan Asset Management have outlined their takeaways for investors from the volatile year. Here are some of their reflections:

Rethink the role of bonds in portfolios

The massive stimulus measures given by global policymakers when markets stalled in March led to a case of a breakdown of what has long been a negative correlation between stocks and bonds. The 10-year yield on US Treasuries rose from 0.3% to 1% within a week, while stock markets continued to decline.

As investors face lower interest rates, even as growth picks up, doubts arise whether developed market government bonds can continue to provide both protection and diversification, and continue to satiate investors looking for income gains. There also is a debate over the traditional investment policy of putting 60% of the funds in equities and 40% in bonds, although the strategy proved to be resilient throughout the year.

“We expect more active fiscal stimulus than any other modern period in history in the next economic cycle, as monetary and fiscal policies align,” said Peter Malone, portfolio manager at JPMorgan Asset’s multi-Asset Solutions team in London. “Future returns from a simple, static equity bond portfolio are likely to be limited.”

Some Wall Street giants recommend that investors adopt a pro-risk policy to adapt to the changing role of bonds. Among them, BlackRock Investment Institute advised investors to switch to stocks and high-yield bonds, according to a note released in early December.

‘Don’t fight the Fed’

Few had expected the rapid turnaround in the markets we saw in 2020. As Covid-19 spread, the S&P 500 Index fell 30% in just four weeks at the start of the year, a much faster fall than the median of a year and a half it took to hit the bottom of previous bear markets.

As governments and central banks supported economies with liquidity, stock prices rebounded at an equally astonishing pace. In about two weeks, the US benchmark was up 20% from its March 23 low.

“Typically, you will have more time to position your portfolio in a correction,” said Mahesh Patil of Mumbai, co-chief investment officer at Aditya Birla Sun Life AMC Ltd. With the markets moving so quickly, someone cash would have “been caught napping at this meeting and it would have been difficult to catch up.”

Being a little rebellious helps, Patil said, adding that it’s better for investors not to make too much money. They should also focus on a bottom-up portfolio so they can go through both upward and downward cycles, he said.

SooHai Lim, head of Asia Equities ex-China at Barings, said the rapid market recovery proved the validity of the old adage “Don’t fight the Fed.”

That said, some fund managers warned investors should not take prompt support from central banks as guaranteed.

“It was flipping a coin where it came from and whether they got in early enough,” said John Roe, head of multi-equity funds at Legal & General Investment Management in London. “The downside could have been unprecedented.”

Teflon Tech

This year’s dizzying rally in technology stocks gave investors a chance of a lifetime. Anyone who missed this theme, which benefited greatly from the stay-at-home and digitization trends during the pandemic, will most likely find their portfolios lagging behind the benchmarks. The top ten U.S. companies that contributed the most profits to the S&P 500 Index this year are all technology-related stocks, ranging from cloud computing pioneer Amazon.com Inc to chip maker NVIDIA Corp.

It’s all technology

These stocks contributed the most to the S&P 500’s earnings this year

Bloomberg

Even with a brief hiatus in November, as positive trial results from a Covid-19 vaccine fueled a rotation into lagging cyclical stocks, technology has ended up as the top-performing sector in Asia and Europe. Supporters of the value strategy saw multiple false starts throughout the year as investors bet that the group of stocks, which are defined by low prices and mainly made up of names sensitive to economic cycles, would finally have their time. They were disappointed.

“Never underestimate the impact of technology,” said Alan Wang, portfolio manager at Principal Global Investors in Hong Kong. Thanks to cheap financing costs, “a lot of new technology has been reassessed and this (pandemic) has created a great opportunity for them to reinvent our lives.”

Innovative stocks are now valued on intangible factors such as goodwill and intellectual property rather than traditional methods such as price-earnings ratios, Wang said, adding that investors should adopt such valuation strategies.

Cash is king for business

The pandemic and the speed at which it devastated markets showed investors to stick with companies with strong balance sheets that can handle the waves of uncertain times.

“The resilience of stocks in a year like this helps to prove their worth and justify their higher valuation multiples in a world of low interest rates,” said Tony DeSpirito, chief investment officer of US fundamental active stocks at BlackRock.

2020 confirmed two important lessons DeSpirito has learned over the years: investors have to perform stress tests on companies to see if those companies’ earnings and balance sheets are strong enough to survive recessions in normal times; and they should spread investment risks and also increase the sources of alpha potential.

Consider collateral damage