Where to look for returns heading into 2021?

Coming out of the turbulent 2020, investors may need some guidance on where to invest over the coming year.

Article updated: 21 January 2021 10:00am Author: Joe Healey

2020, for many of us, was certainly a year to forget with global lockdowns and widespread disruption affecting most of our lives. As a result, we all had to adapt to a new way of living which inevitably saw winners and losers in the market.

Tech stocks unsurprisingly led the way as the transition to homeworking became the new normal, resulting in major tech names soaring such as Amazon and Facebook. From an alternative perspective, we saw the hustle and bustle of city life disappear, causing high-street and customer-facing sectors to suffer. In what was such a disconcerting year for investors, it has been natural to question where returns this year could be made.

As we look ahead it is clear that bonds, particularly government bonds have extremely limited upside whilst low rates and low inflation remain a symbol of the difficult economic times we are in although they may still have a use in portfolios as a matter of prudence. From a top-level view the combination of accommodative policy alongside the prospect of medium-term rising inflation will be supportive of equities. Other options that investors can consider are alternative investments such as infrastructure which are likely to benefit from stimulus packages whilst also providing diversification and protection from inflation.

In terms of regional perspectives, the US has been the topic of much media speculation. Considering valuation concerns were arising before the crisis, they are certainly now. Despite widespread disruption, the S&P 500 returned over 16% for 2020, spurred by tech which comprises 27% of the index. Many are referring to this as a ‘tech bubble’, however there are some who are also questioning whether this is the start of a longer-term structural growth trend. Nevertheless, with the supportive environment expected to remain in 2021 it is likely we will continue to see these stocks rise.

Aside from this, as we start to gain a clearer picture of how the vaccine rollouts are progressing, we are likely to see continued recovery in the cyclical and smaller-mid cap areas of the market as economies begin to re-open. The US energy sector reflects this theme well. In 2020, the sector witnessed a drop of 22% however, heading to the new year this is the leading sector within the S&P increasing by roughly 15% YTD reflecting a clear change in investor sentiment. Adding to this, improvements implemented by damaged companies during the pandemic within these cyclical areas could prove to establish more sustainable business foundations which could attract further investor interest.

In summary, we are not yet out of the woods. Should vaccine efficacy be impacted by new strains, we may see a further downturn in the economy which would severely hamper prospects and growth. However, if we experience a smooth rollout of vaccines and economies begin to reopen it appears equities may be the place to go, particularly cyclical recovery plays (an example being UK equities) as support from low rates, low inflation and further stimulus should help revive investor confidence.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Joe Healey

Investment Research Analyst

Following his completion of the graduate scheme, Joe is an Investment Research Analyst covering equities. He holds a BA Hons Business Management degree and is currently studying towards CFA Level II after passing CFA Level I in June 2019.

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