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Investors rethink role of bonds, tech after chaotic year

THIS has been a year like no other.

Hammered by an unprecedented health crisis, global stocks tumbled into a bear market at record speed, and then rallied to new highs thanks to a flood of central bank money. Bond yields tanked to uncharted lows and the world’s reserve currency surged to all-time highs, only to then 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:

The massive stimulus doled out by global policy makers when markets seized up in March led to one instance of a breakdown in what has long been a negative correlation between equities and bonds. The 10-year US Treasury yield rose from 0.3% to 1% within a week, and simultaneously equity markets continued to fall.

Now, as investors face lower-for-longer rates even as growth picks up, doubts are emerging whether developed-market government bonds can continue to provide both protection and diversification as well as satiate investors seeking income gains. There’s also a debate over the traditional investing policy of putting 60% of funds in stocks and 40% in bonds, even though the strategy proved to be resilient during the year.

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

Some Wall Street giants recommend investors take a pro-risk stance to adapt to the changing role of bonds. Among them, BlackRock Investment Institute advised investors to turn to equities and high-yield bonds, according to a note published in early December.

Few would have expected the swift turnaround in markets we saw in 2020. As COVID-19 spread, the S&P 500 Index plunged 30% in just four weeks early in the year, a much faster tumble than the median one-and-a-half-years it had taken it to get to the bottom in previous bear markets.

Then, as governments and central banks shored up 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.

“Normally you get more time to position your portfolio in a correction,” said Mumbai-based Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life AMC Ltd.. With markets moving so fast, someone in cash “would have been caught napping on this rally and it would have been difficult to catch up.”

Being a bit contrarian helps, Patil said, adding that it’s better for investors not to take too large a call on sitting on cash. They should also focus on a bottom-up portfolio so they can go through both up and down cycles, he said.

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

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

“It was a flip of a coin where it went from there and whether they’d stepped in early enough,” said John Roe, head of multi-asset funds at Legal & General Investment Management in London. “The downside could have been unprecedented.”

This year’s dizzying rally in tech stocks gave investors an opportunity of a lifetime. Anyone who missed out on this theme that benefited greatly from stay-at-home and digitization trends in the pandemic would most likely find their portfolios lagging benchmarks. The top 10 US companies that have contributed the most gains to the S&P 500 Index this year are all technology-related stocks, ranging from cloud-computing pioneer Inc to chip maker NVIDIA Corp.

Even with a short pause in November when positive trial results from a Covid-19 vaccine spurred a rotation into lagging cyclical shares, technology has ended as the top-performing sector in Asia and Europe. Adherents of the value strategy saw multiple false starts during the year, as investors bet that the group of shares, defined by cheapness and mostly comprising names sensitive to economic cycles, would finally have their day. They were disappointed.

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

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

The pandemic and the speed with which it roiled markets showed investors they should stick with companies with strong balance sheets that can ride 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 low rate world,” said Tony DeSpirito, chief investment officer of US fundamental active equity at BlackRock.

2020 reaffirmed two important lessons DeSpirito has learned over the years: investors should undertake stress tests on companies to see if those firms’ earnings and balance sheets are strong enough to survive recessions during normal times; and they should diversify investments risks and also increase sources of alpha potential.

Policy makers’ decisive rescue plans came at a cost for investors in some sectors. European banking shares tanked after being ordered to halt dividends to preserve capital. In Asia, real estate became the second-worst-performing industry after energy shares this year, weighed down by property owners when some markets like Singapore’s passed laws asking landlords to provide some tenants with rent relief.

“The government this time around has been quite heavy-handed,” said SooHai Lim, head of Asia Equities ex-China at Barings. “They have been more coordinated, a lot faster and more decisive.”

Lim said he will price in a higher risk level when investing in certain sectors like banks, which are “definitely more exposed to regulatory intervention.”

ESG-related assets managed to outperform in many pockets of the market during volatility, proving skeptics wrong. For example, an FTSE index of global stocks with significant involvement in environmental markets is up 35% this year, outperforming the global equity benchmark by more than 20 percentage points.

“The Covid crisis has brought the need for more rapid change into sharp focus and we are seeing clients of all types reassess their long-term objectives and the outcomes required of their investments,” said Harriet Steel, head of business development at Federated Hermes.

In fact, the pandemic has prompted massive inflows to ESG-related products. Global funds investing in or adopting strategies related to clean energy, climate change and ESG have grown their assets under management by about 32% from a year earlier to a new record $1.82 trillion in 2020, according to data compiled by Bloomberg. — Bloomberg

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