Outlook 2021 For professional clients only, not suitable for retail investors - Royal London Asset Management
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For professional clients only, not suitable for retail investors.
Outlook
2021
Outlook 2021 RLAM 2
CONTENTS INTRODUCTION
The devil’s in the detail������������������������������ 3 At a human level many people will be happy to see the end
of 2020. For investors, while it has been a rollercoaster,
The challenges awaiting bond investors�������������� 6
most major asset classes have produced positive returns.
Shouldn’t there be more defaults?������������������� 9 As we head into 2021, a huge amount of uncertainty
remains. Governments and central banks helped avoid a
What will drive global equities in 2021?�������������� 11
short-term meltdown during the crisis, but as we move
Will 2021 be the year to invest in the UK?������������ 14 into a post-vaccine world, can they help mitigate the
longer-term impacts? In our 2021 outlook, we ask key
Sustainable investing in 2021���������������������� 16
investors at RLAM what they are focusing on and the
potential opportunities and pitfalls in their asset classes,
to help you make informed investment decisions.
One lesson we all take from 2020 is that thinking and
strategy has to be flexible in the face of changing events.
To see our latest thinking through the year, follow us at
@RLAM_UK on Twitter or on LinkedIn, subscribe in our
email preference centre, or check the ‘Our Views’ section
of www.rlam.co.uk which will be updated regularly.
Outlook 2021 RLAM 3
The devil’s in the detail
Many of us are familiar with the term A shot in the arm
‘black swan’ – shorthand for the
The positive news around the Pfizer,
unpredictable and unforeseeable based
Oxford and Modena vaccines gave
off the book of the same name.
markets a fillip in November, and lifted
It is tempting to look at 2020 and say that spirits everywhere. The effectiveness
the coronavirus pandemic is a black swan of these vaccines, and the speed at
Piers Hillier event. This certainly helps us as investors which vaccination can be rolled out,
Chief Investment Officer to rationalise what has happened and is unsurprisingly the biggest single
Piers joined RLAM in January 2015 decide that we could not have foreseen swing factor for 2021. The global
as Chief Investment Officer, with this or prepared for it. But in this case, economy took a massive blow in 2020.
responsibility for managing and A full recovery – even under the most
labelling 2020 as a black swan and
developing RLAM’s investment
capabilities. He has over 25 years of moving forward feels too simplistic. optimistic assumptions – will take several
investment experience, including roles years. But a relatively swift vaccine
as Head of International Equities and a It is true that no-one – certainly not
roll-out, and the associated reduction
member of the Strategic Policy Group us – foresaw this. Even in late January,
responsible for setting Asset Allocation in lockdowns, will give scope for a
for multi asset portfolios at Kames when we started to see reports of an
decent bounceback in 2021. We know
Capital. Prior to this, he was CIO and outbreak in China, no-one expected that
Head of Asset Allocation for LV= Asset that sentiment is an enormous factor
it would cause such disruption. But while
Management and previously CIO in economic activity: as consumers, do
European Equities for WestLB Asset we can’t have foreseen the specific event,
we feel confident enough to spend in
Management. He also previously held the I am at least happy that RLAM had taken
position of Head of European Equities the shops, eat in a restaurant and go on
at Deutsche Bank and Schroders. In steps to prepare for the unpredictable.
holiday? Do businesses feel confident
his current role, Piers is a director At an organisational level, this included
of Royal London Asset Management
that we are returning to something
robust business continuity planning,
Ltd, a member of the RLAM Executive approaching ‘normal’ – and can
Committee, and chairs the RLAM one element of which was the ability to
therefore invest in their businesses? The
Investment Committee. He holds a transition to work at home (albeit this
Bachelor’s degree from the University faster we answer ‘yes’ to those questions,
of Bristol and Masters degree from the
ended up being for much longer than we
the faster we recover – but note that
University of Oxford. had ever expected). The lesson is one
markets are forward looking and will try
that applies to investing: you can’t predict
to anticipate this.
extreme events, but you can prepare
“
your infrastructure and portfolios to
You can’t predict give them the best chance of weathering Split decisions can be
extreme events, the storms that will undoubtedly come market friendly
but you can prepare our way. Although legal wrangling continues, it
your infrastructure As we came into the final months of appears that Joe Biden will be sworn in
and portfolios to 2020, the large uncertainties were as US President on 20th January 2021.
around the pandemic, the US elections Some policy actions are relatively easy to
give them the best and the UK/EU Brexit deal. At the time of predict, with the US highly likely to re-join
chance of weathering writing, it appears that we have positive the Paris Climate Change agreement.
”
the storms. signs on the first two, with the third still in There are two areas where it is harder
to predict what happens next: the first
the balance
is relations with China, where it appears
that Biden will follow the harder line taken
in recent years, particularly if news from
Outlook 2021 RLAM 4
Hong Kong doesn’t change. The second area, is very small in terms of GDP and and hope that policymakers will take the
is domestic fiscal policy, where the split I would therefore expect something to same view.
control of Congress means that Biden be agreed.
This is not a new idea. I was fortunate
will not have a free rein to pass a fiscal
Financial services is a harder nut enough to be interviewed by the FT1 in
stimulus package. It’s not that I think no
to crack. Financial services across 2016 and thought then that we needed
bill is passed – with the damage caused
Europe provide attractive tax revenues to be more imaginative in addressing the
by the outbreak, I feel that a bill is certain
and thousands of well paid jobs. This problems faced by our economy (and
– but that a Republican-controlled
is an industry overwhelmingly biased society). Low rates and lashings of QE
Senate will demand that he tempers his
towards the UK, and not surprisingly, EU were absolutely the right call in 2008,
instincts somewhat, which will please
governments are aggressively trying because that was a banking sector and
markets worried about increasing levels
to entice parts of that industry from liquidity problem. In the initial period
of government debt.
London to the EU, as they would be mad of this crisis, QE was an important
not to. EU governments will no doubt use component in funding that emergency
Brexit talks: here to stay regulations and incentives to do so, while government support. The emphasis
the UK will point to historic strength and now needs to be on encouraging long-
Brexit is a thornier issue. As an optimist,
the pool of expertise that exists in the term investment – not just in traditional
I believe that a deal will be agreed before
UK. Ironically, the success of each will areas such as housing and roads, but
the end of the year. As an optimist who
rely predominantly on the large US and modern economy infrastructure such
is also a fund manager, I think that the
global financial institutions. If they want to as 5G, fibre, and education not only for
devil will be in the detail. I think that a deal
stay in London, then London will remain the young but to help people develop and
gets done because not doing so it just too
pre-eminent in Europe. If they decide reskill through their working lives.
painful for both sides. My expectation is
to move, then Frankfurt in particular
that we will see a classic EU deal: lots of Sourcing that investment will not be
may challenge.
last minute discussions; announcement easy. Government can help this – both by
of a deal that agrees some aspects; a Longer term, although it seems a fair encouraging foreign direct investment,
lot of details to be agreed at later talks; bet that some parties will want to blame but also through using public funds.
both sides able to say that they stuck to the terms of any deal, the success or Finally, part of this solution means looking
their principles. failure of UK Plc rests with us: we will at encouraging private sector change:
need to build on the example of the recent a huge proportion of UK savings and
The main point here is that Brexit is
trade deal with Japan, but leveraging our investments go into cash ISAs2 . This
not a one-time event. This is a process
traditional strengths such as the rule hurts savers who receive poor real
that will not be completed by policy
of law, business services and financial returns, but also the economy, which is
makers in the next few months, because
services, as well as building upon our deprived of long-term funding.
replacing a complex political and trade
more recent areas of strength such as
framework built over 40 years takes
life sciences and technology.
time. Some areas look like they will be The base effect
easier to resolve – for instance state
This backdrop is one that obviously
aid, where there is a long history of both What is fiscal responsibility? affects markets over the medium term,
sides using this. An example of this can be
A key issue for all governments in 2021 but perhaps not one that has immediate
seen in during the financial crisis, where
will be fiscal policy. An orthodox way impact. Markets tend to be driven by
the KfW, which is nominally an entity
to look at the current situation would data releases – whether economic
separate from the German government,
be to see the extraordinary amount of or corporate – and these releases
stepped in to support banks that were
government spending that was needed are all going to look odd in 2021. In
in trouble. This was the right thing to
in 2020, and as the economy recovers effect, the extraordinary data seen in
do, but shows that state aid rules have
(hopefully) in 2021, to think about ways to 2020 has automatically bequeathed an
always been blurred, and I expect both
cut spending and generally ‘balance the extraordinary 2021. So for example, UK
sides will ultimately acknowledge this.
books’. I think this would be grave error GDP growth will look much higher than
Similarly fishing, although an emotive
Outlook 2021 RLAM 5
in recent years simply because of the fall depressed levels. We will all be keeping analysis of covenants will demonstrate
in 2020. Similarly in corporate earnings, an eye on the US treasury 2s10s chart. their value.
companies that had to shut or severely (See figure 1)
As we look back on 2020 with hindsight,
restrict their activities in 2020 (and
it was clear that it was a year to be
hence saw big negative earnings) may
Investing in a thematic; as an equity investor, if you
see big rebounds in 2021. The inverse
post-covid world avoided banks and energy stocks you
will probably also be true – we saw a
were probably okay. As the cost of capital
massive increase in online sales in 2020 I’m often asked as a CIO what you do
starts to increase, economies recover
and it would not be a surprise if growth in when everything appears different. The
and the ‘new normal’ starts to assert
2021 looked lacklustre by comparison. conversations I have with fund managers
itself, I believe that 2021 will be a year for
across RLAM are usually focused on
Fiscal deficits and increased economic stock pickers across asset classes, as it
sticking to what we know. While we have
activity could see an increase in becomes clearer whose business model
different investment processes across
inflation – for instance driven through is robust, who can adjust, and who can’t.
different asset classes, we do have a
commodity prices, which have been
focus on stock selection and knowing I also expect to see more emphasis on
weak in 2020. Ordinarily this would be a
what we are investing in. Credit is an responsible investment, in the widest
concern, but in this instance, this will be
excellent demonstration of this: our sense of the phrase. We will use our
driven by this same base effect: I don’t
philosophy is to act as medium-term influence on policymakers to build back
see inflation as a major concern simply
lenders rather than short term bond better3 and support initiatives such as
because wage inflation is unlikely to be a
traders. Defaults have been very low the Just Transition4 . As part of a mutual
problem at a broad level simply because
so far thanks to the various emergency and customer oriented organisation,
unemployment is going to be a lot higher.
support measures, and also the fact that we believe that the integration of ESG
But the market will ultimately be driven by companies have been able to benefit from factors is more important than ever.
vaccine news in the near term as that is those ultra-low rates to raise money We believe that companies that have
the swing factor. If a roll-out progresses from capital markets. As those rates stronger ESG credentials will perform
well, not only will this support risk assets, increase, will the economic recovery be better over the longer term. If we look at
but at some point the market will start to enough to compensate for this higher the initial stages of the crisis, this gave
price in an end to ultra-low rates – even cost of capital? We will see, but it could everyone insights into how companies
if this is still a reasonable way off – which actually lead to higher default rates than view their staff and customers: did
means that long-term rates could be we see right now. And it is at this point companies try to do the right thing? Did
expected to rise from the currently very that our research, due diligence and directors push staff towards furlough
while taking full pay and bonuses?
We would argue that in a post-pandemic
Figure 1: US 2 year 10 year spread over last decade world, consumers and therefore
Source: FactSet as at 12 March 2020 investors will increasingly shun
companies that are seen to behave
US Benchmark Bond –10 year average: 125.58;
300 high: 289.11; low: -4.37; last: 79.12 in these ways. We’ve placed a great
250 emphasis on responsible investment for
200 a long time, partly because of this, but
150 also because it fits with our purpose as
100
a mutual. If the macro environment is
still uncertain in 2021, I believe that the
50
trend to hold companies (and the asset
0
managers that invest in them) to account
-50
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will only gather even more pace.
Past performance is not a reliable indicator of future results.
Outlook 2021 RLAM 6
The challenges awaiting
bond investors
The magic money tree is alive. to this the accommodating stance of
Governments around the world have the BoE, and it seems very unlikely that
been able to issue vast quantities of IOUs we will have a return to the financial
without disturbing the price of this debt. restraint introduced after the Great
Some governments are even paid to Financial Crisis.
Jonathan Platt
issue debt.
Head of Fixed Income What does this mean for bond yields?
Jonathan Platt joined RLAM in 1985 Government actions have cushioned Short rates are anchored at near
and became Head of Fixed Income in economies and central banks have zero and will stay there for a long time
1992. Jonathan has managed a range
of funds throughout his tenure at RLAM. stepped up with renewed quantitative (possibly five years). As BoE intervention
He has overseen the development of easing (QE). This interaction of fiscal via QE becomes a diminishing support
both the fixed income process and the
and monetary policy has meant for government bonds, expect long yields
highly respected Fixed Income Team. He
remains committed to the management that equity prices, bond yields and to go higher – hence the favouring of
of client portfolios. Jonathan is a commercial property valuations have short duration strategies in the medium
director of RLAM and has an MA in
Philosophy, Politics & Economics from not reflected the economic upheaval term. This has to be set in context: higher
Oxford University. we are experiencing. In the UK, QE has long yields will still look low by post-war
been expanded so that by the end of next standards, but remember a 1% rise in
year, assuming no further expansion, the 50-year gilt yields implies a capital loss
“
Bank of England (BoE) will own almost of 30%. (See figure 2)
How do we £900bn of UK government debt and
get off the QE
So should we worry about inflation? One
total government debt will equate to
of the traits fund managers have to fight
merry-go-round? £30,000 per head, and this does not
against is anchoring their expectations
include unfunded pension commitments.
Not easily and not to the conditions that prevailed in their
”
for some time. The reason that UK bond yields are so
low in the face of large supply is twofold:
formative years. For those that grew
up in the 1970s and 1980s, inflation
the economic shock has further pushed seemed endemic and some have spent
down real yields and the extra supply of the last 30 years looking over their
debt resulting from this shock has been shoulders for its return. Global markets
neutralised by the BoE. This is a global see no imminent return. If we look at
phenomenon and is not uniquely British. long-dated US treasuries the implied
long-term inflation rate is below 2%,
How do we get off the QE merry-go-
and for German bunds it is nearer 1%.
round? Not easily and not for some time.
The UK is a bit of an outlier, with CPI
We expect a further extension of QE
implied inflation a bit above 2%. For those
in 2021 as the government and BoE
that forecast an economic “Ice Age”
will not want a rise in government bond
even these implied inflation rates seem
yields that would result from heavy net
high. For others, the consequences of
supply. The Magic Money Tree (MMT), or
Covid-19 are inflationary and inflation-
Modern Monetary Theory as economists
protected bonds offer insurance
prefer, says this is not a problem and that
against uncertain times; an uncertainty
governments with their own currencies
heightened by US/China trade tensions
can carry on spending and issuing debt
and the change in US leadership.
until inflation becomes a problem. Add
Outlook 2021 RLAM 7
Figure 2: Gilt yield curve UK yield curve
Source: RLAM as at 31 October 2020
% Curve 31 Dec 18 % 10 year UK gilts
2.0 Curve 31 Dec 19 5.0 30 year UK gilts
Curve 31 Dec 20
1.5 4.0
1.0 3.0
0.5
2.0
0.0
1.0
-0.5
0.0
204%
22
205%
4. 5
205%
4. 7
205%
4. 0
205%
32
205%
4. 4
205%
4. 6
205%
38
205%
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20 %
4. 0
205%
46
205%
4. 9
205%
55
204%
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205%
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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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Figure 3: Average investment grade sterling Average investment grade sterling credit spread
credit spread (12 months)
Source: RLAM as at 31 October 2020
bps Non-gilts Insurance (sub)
bps
22
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Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed
and may go down as well as up and investors may not get back the amount originally invested.
Where do we stand? Index-linked bonds risk. If we enter a deep economic opinion, credit has been an undervalued
comprise two key elements: real yield recession governments will spend more, asset for long-term investors, with
and inflation. In our opinion the real yields supported by electorates. If economies spreads more than compensating for
segment is too low and will rise over time. rebound more quickly governments will default risk, and it is attractive for those
By any past standards the real yield on continue to provide significant support, investors that can accept periods of
government debt is off the scale - never fearing premature fiscal or monetary heightened illiquidity so that they can
has the UK government (or actually any tightening. When inflation is priced to benefit from the significant extra yield
government over the last 300 years) reflect the circumstances of the last 30 available relative to government bonds.
been able to issue long-term debt with the years and we have had such a shock, it This has not changed. However, Covid
promise that the return will be 2% less than may pay to be prudent and get some has created winners and losers in the
inflation. Conversely, inflation protection added insurance. Again, our preference short term and the ongoing economic
appears cheap. In an environment of is for shorter-duration strategies. realignment will lead to significant shifts
changing supply chains (less efficient), low over the medium term. The immediate
So what about credit markets? In sterling,
capital investment, rising protectionism losers have been the travel, leisure,
as in dollar and euro markets, credit
and declining globalisation the current transport and retail sectors, while the
spreads on investment grade bonds are
pricing of inflation looks attractive. This is winners have been in pharmaceuticals,
broadly back to where they started the
not because we expect a surge in inflation food, logistics and technology. So within
year. Does this make credit expensive?
but due to uncertainty. We do not know investment grade credit an unchanged
No – although not as cheap as it was in
how Covid will play out in the longer term credit spread disguises a lot of variation.
March when the average credit spread in
but there appears to be asymmetry of (See figure 3)
sterling rose towards 2.5%. In our
Outlook 2021 RLAM 8
What does the future hold? The banking remain underweight issuers with a high More challenging is our exposure to
sector has performed relatively well dependency on discretionary spending. transport through airports, train and
so far, cushioned by government An exception is the pub sector where bus operators. Government support has
intervention to protect against a rise in seniority, security over assets and low been vital here, dampening the impact on
bad debts. They will come, but capital loan-to-values give us strong conviction borrowers’ balance sheets. In the case
positions are far healthier than in 2006. over the strength of our lending position. of Heathrow and Gatwick, while they
Intervention by regulators to prevent In essence, our clients get paid well have been substantially impacted in the
dividend distributions shows that UK for these risks. The retail fallout has short term, we believe that they are vital
banks are not truly independent (if they impacted the real estate sector with infrastructure with long-term futures,
ever were); from a bond perspective Intu going into administration and and that security and covenant protection
this is encouraging and we continue to Hammerson struggling under its debt in our senior bonds have proved vital in
be overweight the sector. Expect to see burden. Longer-term out-of-town protecting clients’ interests through this
consolidation among challenger banks shopping may be a relative winner, but exceptional stress.
and further cost reductions in the majors a key challenge will be transforming
We remained committed to identifying
as digitalisation and technology change shopping centres to compete (in a
risk (financial and ESG) and ensuring that
the way people bank. Similarly, and driven different way) with the online experience.
our clients are appropriately rewarded
by valuation, we like the insurance sector
Some of the sectors in which we are for the positions we take. We believe that
and have been adding to it throughout
overweight: utilities, social housing our approach of capturing extra income,
the year. In a more precautionary
and infrastructure (hospitals, aligned with risk mitigation through
world, personal savings will rise and
military accommodation and offshore security and sector diversification, a
life insurance may benefit from these
transmission operators) have come preference for secured bonds and
changes. We believe reinsurers will bear
through the crisis pretty well and we strong covenant protection is ideally
the brunt of Covid claims but will be able
expect this to continue. These sectors suited to the challenges that lie ahead.
to weather this storm.
are much less susceptible to business
In consumer areas the biggest model disruption from technology, an
challenge will be in retail and we impetus greatly accelerated by Covid.
Outlook 2021 RLAM 9
Shouldn’t there be
more defaults?
March was a scary time for high yield bondholders were often happy to forgive
investors. Just a month earlier the high yield and waive them. So companies could
spread had been close to its tightest post- continue paying interest, servicing debt
crisis level, yet in March investors found and funding operations despite the
themselves contemplating a frightening absence of revenue streams.
Azhar Hussain spread of c. 1200 basis points. Moody’s
Head of Global Credit There was also positive news on the
was forecasting a 10% US default rate
Azhar has 24 years of direct experience coronavirus. The lockdowns turned out to
as its base case, with 16% as its worst
of investing in an array of strategies be shorter than many had envisioned back
across the Global Fixed Income and case scenario, while the market spread
in March, enabling economies to reopen
Leveraged Finance arenas. He trained implied that investors thought it could be
as a chartered accountant with Deloitte briefly. That means that unemployment
much worse than even that.
before starting his investment career numbers are lower today than had been
as a high yield credit analyst at Gulf
The rationale for all of this pessimism was expected in March, albeit there could be a
International Bank. He subsequently
became Head of Corporate Debt being the experience of 2007/8. Recessions surge as furlough schemes roll off. It also
responsible for IG & HY absolute and tend to be correlated with high rates of resulted in generally upbeat earnings
relative return strategies. He left to
default, collapses in revenues and seasons as companies reported better-
join Insight as Head of HY & Leveraged
Loans before joining RLAM, initially plummeting oil prices; serious given that than-expected revenues.
as Head of Global High Yield, where the energy sector constitutes around
he has successfully launched funds Although the high yield market has
15% of the high yield market. All this
across the Global HY & Multi Asset recovered quite remarkably this year,
credit strategies. Azhar holds a BA in prompted central banks and governments
the high yield spread is still above its
Economics & Law from SOAS, University to respond with unprecedented speed
of London and recently obtained an MSc levels before the March meltdown.
and scale in an effort to restore
in Behavioural Science from LSE. Nevertheless, because the cost of capital
confidence to save their economies.
(the risk-free rate) has fallen to all-time
“
Central banks reduced interest rates lows, companies in the high yield market
to rock-bottom levels and unveiled are currently able to borrow at the
The outlook enormous stimulus packages. The US cheapest levels ever in absolute terms.
for the high yield Federal Reserve pledged direct support
At the same time, the composition of the
market has become for the high yield market as it committed
to buying fallen angels (bonds which had
market has significantly changed as a
dramatically recently lost their investment grade
result of the influx of fallen angels (primarily
”
brighter.
in the energy sector) and the elimination
status) as well as high yield exchange-
of the most vulnerable credits. This has
traded funds. For its part, the European
increased the quality of the market since
Central Bank also announced that it
fallen angels tend to be bigger, more
would purchase fallen angels.
complex capital structures that are usually
This flushed the market with liquidity at BB rated. The rush of companies seeking
reasonable levels, radically altering the to raise liquidity following support from
fate of the pessimistic high yield investors. the Fed, many of which did not need it, has
It also turned out that many of the things also helped the market to grow in size.
that investors had spent years complaining
In many instances this liquidity-driven
about (such as the looseness of covenants)
issuance reflected an abundance of
gave companies the lifelines they needed
caution, as companies feared undergoing
to survive. Even when the covenants were
years without revenues. The recent
genuinely tight, companies found that
wave of positive vaccine news suggests
Outlook 2021 RLAM 10
Figure 4: Market expectations of defaults Figure 5: Defaults should remain manageable
Source: RLAM as at end September 2020 Source: RLAM as at end September 2020
April forecast
%
16 October forecast 14
14 12
12 10
10 8
8 6
6 4
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2020 2021 2022 2023 2024
Ja
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed
and may go down as well as up and investors may not get back the amount originally invested.
that the return to normality is likely to be UK, with the Cinemark, which runs cinemas good chance that cinemas will reopen by
much faster than that and so we think that across the US, Latin America and Taiwan. the middle of next year.
many of these cautious companies, not
Heading into the crisis, AMC had leverage Back in March the market assumption
needing so much liquidity, will repay their
of around 6x. It is likely to emerge from it was that both companies were doomed
debt over the next couple of years as they
(assuming that its EBITDA returns to to default. But this all changed with
revise their pessimistic assumptions for
pre-crisis levels) with over 8x total the Fed’s intervention. Cinemark now
the broad economy made in March.
leverage and 5x senior leverage. It is looks like a survivor, while the default
Even the most Covid-facing credits have certain to impair its subordinated debt probability for AMC has remained
been able to raise substantial liquidity. Of and it is reasonable to assume that it will largely unchanged. Central banks have
course, these credits are still going to do the same with its senior debt as well. not simply delayed inevitable defaults for
be where we will see the most defaults in The company currently has liquidity to Covid-exposed companies, they have
the future. Yet in most of these situations, last until January by virtue of issuing provided crucial lifelines that have turned
the likelihood of default is relatively additional debt, waiving covenants and many into long-term survivors; with the
well priced, which reduces the market issuing equity, but even with entirely open proviso that they were in reasonable
impact. Whether an individual company economies from January it is going to health prior to the crisis.
will default depends upon several factors: struggle to grow back into its capital
So the outlook for the high yield market
how much leverage did the company structure. It is reasonable to assume the
has become dramatically brighter. Many
have before the crisis hit? For how long company will default at some point.
investors have been very slow to realise
has it lost revenues? How much has it
By contrast, Cinemark had 2x leverage quite how significant the central bank
compensated for that by issuing debt?
heading into the crisis and will probably interventions have been, continuing to
Can it grow into its capital structure by
emerge with 3x leverage. Rather than operate for months afterwards with
increasing EBITDA?
until January, it has sufficient cash to the pessimistic assumptions that they
A great example of the difference that survive with zero revenues for the next made in March, before the bulk of
these factors make can be seen in the 18 months. At that point it has a very the interventions took place. Market
cinema sector. This is among the most reasonable chance of being able to expectations for the default rate have
Covid-exposed sectors, having been refinance its debt, grow back into its been steadily falling, but we still think they
penalised by lockdowns severely with capital structure and avoid defaulting. are overly bearish. We think the high yield
chains having to operate on zero revenues Cinemark was one of the first companies spread significantly overcompensates
for most of the year. Let us compare the to issue senior debt in the market (at investors for the risks they take. All this
world’s largest cinema chain AMC 8.75% at the time) following the Fed’s leaves us feeling incredibly bullish for our
Entertainment, which operates AMC intervention in April. It probably won’t asset class in the year ahead.
Theaters in the US and the Odeon in the need that liquidity because there is aOutlook 2021 RLAM 11
What will drive global
equities in 2o21?
This year has been both challenging cross party consensus, and are likely
and full of longer term opportunities for to evolve into a cold war centred on
equity investors with market volatility and technology. Geopolitical tensions
dislocations caused predominantly by the will ebb and flow, with crisis periods
COVID-19 pandemic, but also the US that could affect markets, but the
Peter Rutter
elections and Brexit. ongoing battleground will be through
Head of Equities
technology and partisanship – Huawei
Peter Rutter is Head of Equities at Royal Assuming the Republicans retain their
London Asset Management (RLAM).
and 5G was the opening salvo in a
Senate seats in Georgia (January
Prior to joining RLAM, Peter was Head of longer-running conflict. We are likely
Global Equities at Waverton Investment election) there will be a significant
to see the emergence of two global
Management. His team manages equity degree of political deadlock in the US.
mandates for institutional, pension, technology supply chains in critical
Historically this kind of deadlock has
charity and retail clients. Peter is also a areas like 5G, and this may impact
global equities portfolio manager with been good for equity markets as the
over 18 years’ experience, and as head of
stocks and sub-sectors both positively
regulatory and policy environment is
RLAM’s global equities investment team, and negatively.
he leads a differentiated and successful more likely to be stable for the next
investment process which is built around 4-5 years. 2 Inflation is a low probability but
a corporate Life Cycle concept and key risk.
includes ESG integration. Peter is a CFA
charterholder, a chartered management
Looking forward The shape and speed of the recovery
accountant (CGMA) and read Geography
from Covid-19, and how inflationary
at Cambridge University, where he
So, if political risks and pandemic related this is, are key questions. A successful
achieved a double First Class degree
with distinction. volatility are less significant going into vaccine will certainly have an impact,
2021, which factors could most influence but the extent to which certain
global equities in 2021? The timing of
“
sectors, countries, consumer and
investment themes and topics can be
After the
corporate behaviours are scarred
hard to predict so these are some key or permanently changed will be key
wild ride of 2o2o, issues that could develop over the next six to understand.
plenty of challenges to 24 months:
In terms of portfolios, inflation could
remain for the 1 Trade wars aren’t going away, be a key risk given the sheer scale
”
year ahead.
they will instead morph into of government and central bank
technology wars.
support. It won’t be high by historical
While 2020 started with the signing standards, but after recent years,
of the phase one trade deal between record low bond yields are incredibly
the US and China, before Covid-19 vulnerable to inflation perceptions and
it was likely that President Trump any changes could have significant
would have played the underlying knock-on impacts to equity markets. .
tensions to maximum effect in the
Were inflation to start to rise, and
run up to the elections. However, it
central banks feel constrained by
would be wrong to see them purely
political pressure, there could be a
as a Trumpian electoral device.
significant reversal of the growth
While President Biden will be more
versus value trade (see figure 6)
constructive in tone, the US-China
that has paid off for the last decade
tensions are real with high levels of
or more.Outlook 2021 RLAM 12
for portfolios: if monetary stimulus
Figure 6: Growth stocks have outperformed in recent years is paramount, this will favour growth
Source: RLAM as at 30 November 2020
stocks, but with fiscal stimulus it would
be better to buy banks, consumer
% MSCI World Growth total return relative to the MSCI World Index discretionary and materials sectors.
100 MSCI World Value total return relative to the MSCI World Index
80
5 The UK stock market is not
60
anomalously cheap.
40
20 The FTSE 100 has endured another
0 poor year in 2020, failing to recover
-20 strongly following the impact of
-40
Covid-19 and with the ongoing
-60
uncertainty over a post-Brexit trade
-80
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 deal with the EU. Some commentators
have speculated that the UK market
is particularly ‘cheap’ and will bounce
Past performance is not a reliable indicator of future results. The value of investments
back in 2021 after several years of
and the income from them is not guaranteed and may go down as well as up and
investors may not get back the amount originally invested. underperformance, which coincide
with the period since the Brexit
referendum in 2016.
This structural inflation risk the market on subscriber numbers.
would appear to be relatively low This assumes, however, that the
Similarly, there could be significant
probability given some very significant underperformance of the UK
disparities between the more cyclical
deflationary forces in markets – market has been wholly due to Brexit
companies that have been hit by
excess capacity, high unemployment, uncertainty. In fact, other factors,
COVID-19 but ultimately have strong
high levels of debt and low population such as the sectoral composition
management, business models
growth. However, at the same time and the maturity of the companies in
and resources to do well over time
no-one really knows the impact of ever the UK market are arguably just as
compared to those that were already
more aggressive monetary policy and important. It is a myth that the UK is
struggling before the pandemic and
the effects of central banks funding anomalous. It may look cheaper than
after the COVID recovery bounce
government deficits. other markets, but this differential
those major issues remain.
falls markedly once you adjust for
3 Stock selection will be essential. 4 Fiscal stimulus will be crucial. the ‘quality’ of companies and the
After this year’s wild dispersions sector exposure of the FTSE.
Even before Covid-19 required
between some technology leaders and Indeed, if you reweight the S&P 500
massive fiscal support from
more cyclical or leveraged sectors, to have the same sector exposure
governments and central banks,
it’s hard to say that stock selection as the UK, it would be on a similar
there had been a shift away from
will be more important in 2021 – aggregate valuation.
purely monetary to fiscal support. The
however, demanding valuations make new Conservative government that Furthermore, the idea that a trade
some stocks vulnerable. For example, was elected last December and the deal might catalyse a rerating of the
we need to differentiate between German government had been talking UK stock market is questionable. It
those technology companies that about fiscal packages, particularly in could lead to sterling strengthening
have done very well because they have support of environmental policies and against global currencies, which
pulled demand forward, and those for to boost regional economic growth. would be unhelpful for the FTSE 100
whom there has been a more positive However, this option now seems less as c. 70% of corporate revenues
structural shift in their end markets. In likely in the US with the more fiscally- come from outside the UK. What this
the former category, some companies conservative Republicans controlling all means is not so much that the UK
will face difficult days as they update the Senate. This will have implications is an obvious valuation buy versus theOutlook 2021 RLAM 13 rest of the world but it is a potential After the wild ride of 2020, plenty of compositional, thematic and style challenges remain for the year ahead. rotation buy. A reasonable Brexit In practice, in most years relative outcome and a recovery in financials, performance isn’t driven by black swan energy and materials could see the UK events, but instead by the relentless focus significantly outperform global peers. on quality, positive change, stock specific Within the large number of companies wealth creation and valuation. We believe in the UK as well there will always that a very well diversified portfolio is the be some high quality stock selection most effective way of coping with risk and opportunities as well – something that uncertainty, particularly where stock can be forgotten in a market that has selection is active through shareholder been weak in aggregate. wealth creation and valuation insights.
Outlook 2021 RLAM 14
Will 2o21 be the year to
invest in the UK?
It is no secret that global asset allocators confidence. 2021 could well be a year in
have been pessimistic about UK which the major economies experience
equities, but could 2021 be the year synchronised growth.
when sentiment changes? The UK has
From a bottom-up perspective, these
faced a number of geopolitical and
Henry Lowson improvements have manifested in
macroeconomic headwinds in the recent
Senior Fund Manager – Equities company earnings. The net earnings
past and the composition of the FTSE
Henry joined Royal London Asset revision ratio has been on an upward
Management in September 2016
All-Share Index, namely its high exposure
trajectory as analysts’ overly pessimistic
as a Senior Fund Manager and is to relatively unpopular sectors such as
lead manager on the RL UK Smaller earnings forecasts for 2020 have
oil & gas, mining and banking, has only
Companies Fund and RL UK Mid Cap recently been raised following upbeat
Growth Fund. Henry began his fund reinforced its unpopularity.
corporate trading statements.
management career in 2005, spending
almost 12 years working for AXA Furthermore, Covid-19 has had a Companies have proven themselves
Investment Managers. In May 2012 he profound impact on all economies adept at not only cutting costs and
became lead Fund Manager of the AXA
Framlington UK Smaller Companies and company earnings expectations capacity but also at managing debt
Fund, which he ran successfully until during 2020. Changing corporate and balance sheet liquidity. Earnings
joining RLAM. He was also responsible
and consumer behaviour has led to forecasts for 2021 now look
for co-managing a variety of segregated
UK small/mid cap mandates while at acceleration in digitalisation, which has eminently achievable.
AXA. He is a CFA Charterholder and favoured technology stocks, in particular,
a Member of the Chartered Institute We believe that despite the challenges
for Securities and Investment. Henry
during the year. The UK market’s lack of
of Covid-19, well-managed and well-
graduated from Edinburgh University exposure to this sector has resulted in
in 2004 with a MA (Hons) degree in invested companies are set to benefit
marked underperformance relative to
Economics and Geography. from three important new growth
US and European markets.
drivers. First, the lockdown has been
However, with this level of bearishness, an opportunity for some companies to
“
it would not take much to see a major acquire new customers that ordinarily
Earnings unwinding of the underweight positioning they might not have been able to. For
forecasts for 2o21 towards the UK. Indeed, some of the example, discount retailer B&M, which
now look eminently headwinds are already clearing, as the gained essential status in lockdown,
”
achievable.
UK economy has bounced back hard video games developer Team 17 and
from the effects of Covid-19 and has financial platform AJ Bell are just a few
entered the final phases of Brexit. There of the companies to have benefitted from
are currently unprecedented monetary a significant increase in their customer
and fiscal stimuli driving the recovery, base, and thus long-term revenue-
with historically low interest rates, generating potential.
government-backed loans, tax holidays,
Second, geographical lockdowns have
increased infrastructure spending
focused customers’ attention on risk in
programmes and housing support,
their supply chains. For example, in the
among many others. The consequence
food producing industry the retailers are
of these measures has been borne out in
placing a premium on the continuation
some of the recent data, with significant
of service levels during these turbulent
improvements in industrial production
times, and reassessing the ability of
numbers, inventory data and business
their suppliers to cope with the massiveOutlook 2021 RLAM 15
fluctuations in demand that have been opportunities. These companies are sterling (which lowers the valuation of
experienced. This period has therefore seeking to expand and capitalise on the UK companies for overseas buyers) all
been an opportunity for well-invested hardening insurance premium rate cycle render such activity more attractive.
suppliers like Cranswick (pork and when other companies, without the ability We expect these conditions to remain in
poultry) and Hilton Foods (red meat and to resort to shareholders, have been place in 2021, providing a tailwind for UK
fish) to gain market share off their rivals. exiting the markets. market performance.
Other retailers, such as those selling
As ever, the severe lack of research for The UK small and mid-cap markets are
eyewear, have sought to diversify from
smaller companies continues to result particularly exciting places to invest
a predominantly Chinese supply chain
in plentiful opportunities for discovering because it is possible to find dynamic
by increasing their sourcing from other
under-appreciated gems (see figure 7). and innovative companies that can grow
countries such as Vietnam. Inspecs,
A great example is the miniature in spite of what may be challenging
the eyewear manufacturer, has been
wargames manufacturer Games economic conditions. This has been
a beneficiary of this trend (it operates
Workshop, which until recently had only borne out in 2020, with the FTSE AIM
facilities in both Vietnam and China).
one analyst covering it. The company All Share Index currently in positive
Third, some companies have raised performed strongly throughout the territory this year. The survivors of
money not just to strengthen balance lockdown (increasing its customer 2020 will inherit a world of opportunity,
sheets but to give them firepower to base by 40% to 8m) as it engaged with and for the reasons we have outlined we
make acquisitions in an environment customers that had more time on their think it is an exciting time to be invested
where valuations for targets are likely hands via social media, and sold to them in the UK.
to be lower. For example, Diploma, the directly rather than through third-
specialist distributor, recently raised party suppliers. It is now worth more
money to acquire ‘Windy City Wire’, a US than £3bn.
provider of premium quality, low voltage
Merger & acquisition activity has also
wire and cable. This was a significantly
continued despite the market volatility,
earnings-accretive deal. Others, like the
such as a bid for our holding in video
Lloyds Insurance vehicles Lancashire
games company Codemasters. The
and Beazley, have raised money to
low cost of debt, appealing equity
take advantage of accelerating growth
market valuations and weakness in
Figure 7: Declining sell side coverage
Source: Citi Research as at 31 August 2020
# of stocks (LHS)
150 Average analyst per stock (RHS) 25
19.5
125
20
15.3
100
15
11.3
75
7.6 10
50
4.1
3.1 5
25 1.8
0 0
< £250m £250m - £500m - £1bn - £2bn - £5bn - > £10bn
£500m £1bn £2bn £5bn £10bn
Past performance is not a reliable indicator of future results. The value of investments
and the income from them is not guaranteed and may go down as well as up and
investors may not get back the amount originally invested.Outlook 2021 RLAM 16
Sustainable investing
in 2o21
Our outlook as sustainable fund becomes more normal. Will many people
managers shouldn’t change too much still be organising Zoom quizzes for their
from year to year. Sustainable themes friends this time next year?
tend to unfold over a decade or more –
12-month investment periods are rather
Mike Fox Dialling up digitalisation
short term when facing global challenges
Head of Sustainable Investments
like climate change and plastics pollution. Against this, we have seen a quantum
Mike joined Royal London Asset
Nonetheless, clients quite reasonably leap in some activities and processes
Management in August 2013 following
the acquisition of The Co-operative Asset like to know that we’ve identified potential that will never reverse. Since Satya
Management by the Royal London Group. Nadella, the CEO of Microsoft, said
risks and opportunities in the near term.
He is Head of Sustainable Investments
at RLAM. Mike became a fund manager earlier in the year that Covid-19 has led
One might imagine that after such a
in November 2003 when he took over to two years of digital transformation in
managing the RL Sustainable Leaders tumultuous year next year will be much
two months, such phrases have become
Trust. Mike originally trained and more stable and predictable. It seems
qualified as a chartered accountant with rather clichéd.
Ernst & Young in Manchester. reasonable that 2021 will see vaccines
rolled out and a return to some sort Nonetheless, the shift in working
of normality by the second half of the practices and online retail has been
“
year. The US election results support profound and has surely accelerated
The this, particularly as the likely split of the the decline of the physical world (retail,
consideration Presidency and Senate creates the kind
of stasis that markets like.
transport and offices), offset by the
rise in the digital economy. This is very
of ESG factors positive from a sustainable perspective,
was already going Yet this ignores maths. After such a
challenging year, against very weak
although the social upheaval in terms
mainstream, comparisons 2021 must be exceptional
of employment prospects and possible
but 2o2o has
social exclusion will need to be mitigated.
in its own way – the next ‘normal’ year
supercharged will be 2022. While markets have Some may feel that the rate of
”
technological change must slow from
this trend.
managed to look through the shorter-
term impact of the pandemic, with here, yet the opposite could be true.
government and central bank support Why should trends such as industry
on an unprecedented scale, this creates 4.0 (based on ‘big data’) and artificial
challenges for fund managers as we try intelligence slow down? More prosaically,
to identify the winners and losers over less than 30% by value of retail activity is
the full period. currently online, with food and clothing
potential areas of further growth;
In theory, the sectors that have been
Amazon has also identified the pharmacy
most impacted by Covid-19 in 2020
market as an underpenetrated niche. It
should benefit most from a return
has recently been interesting to hear the
to normality, while financials will be
shock of housebuilders that people were
supported by a rise in bond yields, albeit
prepared to buy new houses online when
from very low levels. In contrast, some
show homes had to close.
‘lockdown winners’ could struggle if their
2020 sales bonanzas reverse as lifeOutlook 2021 RLAM 17
Similarly, 80% of work processes are still This year has also seen a further shift in Summary
hosted on work premises, so cloud-based the understanding of and commitment to
A range of vaccines for Covid-19 will
working has plenty of room for growth. sustainable investing. The consideration
enable ‘normal life’ to resume from next
Investors have been over-estimating the of environmental, social and governance
summer as social distancing is no longer
level of technical progress for the last (ESG) factors was already going
necessary. In the meantime, President
20 years and value rotations have nearly mainstream, but 2020 has supercharged
Biden has committed to reversing his
always been short lived, so it seems this trend. Yet, according to the Investment
predecessor’s decision to leave the Paris
sensible to stick with the themes that Association, less than 5% of assets under
Agreement on climate change. To some
we’ve identified over recent years. I’m not management are in sustainable funds.
extent, this will be a headline change as
saying that there can’t be a correction, There is still a long way to go.
much of the legislation is actually made
but we invest for the long term and will
For society and governments to achieve at a state level, but it’s far better to have
stick to what has worked well.
the various targets that they have set, the global economic superpower inside
finance and capital allocation will be a the tent, particularly as China recently
The bigger picture critical component of these changes. committed to ‘net zero’ by 2060.
New EU regulations that will come into
Covid-19 put the brakes on the world, With politics and the pandemic potentially
effect in 2021 are part of the carrot and
stopping the hamster wheel for long less disruptive in 2021, we will continue
stick approach that is shifting the dial for
enough for governments, businesses and to focus on identifying companies that
the asset management industry. While
consumers to reflect on what we are support the transition to a cleaner,
investors must be cognisant of the risk
doing, how we are allocating capital and healthier, safer and more inclusive
of investment greenwashing by asset
how sustainable our way of life is. Away society, and those that show ESG
managers that have been slow to react
from the pandemic, the temperatures in leadership in their sectors. This is how
to the changes, we prefer to focus on
the Arctic are rising quickly, while we define sustainable investing.
the progress.
wildfires in California and Australia have
increased in frequency, scale and ferocity.
Whether in spite of or because of
Covid-19, this year has also seen a sharp
increase in social awareness, most
radically demonstrated by Black Lives
Matter, but also in a wider focus on
diversity and inclusion. Companies have
faced more scrutiny of their cultures
and how they intersect with multiple
stakeholders. It can be easy to hide behind
PR initiatives when times are good, but
the pandemic has given us an opportunity
to compare how companies in the same
sector made choices around competing
factors, such as redundancies, executive
pay, dividend cuts, balance sheet
resilience and future investment.
Many companies have faced tough
choices, but those with strong corporate
values and R&D programmes that are
aligned with sustainability have fared
better. Others will find it much harder to
‘greenwash’ investors in future.Outlook 2021 RLAM 18
Notes For professional clients only, not Telephone calls may be recorded. For further
information please see the Legals notice at
suitable for retail clients. www.rlam.co.uk
1 https://www.ft.com/
content/807f6896-6e91-11e6- Past performance is not a reliable Issued in December 2020 by Royal London Asset
Management Limited, 55 Gracechurch Street,
a0c9-1365ce54b926 indicator of future results. The value of
London, EC3V 0RL. Authorised and regulated by the
investments and the income from them is Financial Conduct Authority, firm reference number
2 https://www.royallondon.com/ not guaranteed and may go down as well 141665. A subsidiary of The Royal London Mutual
siteassets/site-docs/media- as up and investors may not get back the Insurance Society Limited.
centre/policy-papers/royal- amount originally invested. Ref: MC RLAM PD 0006
london-policy-paper-10-the-
curse-of-long-term-cash.pdf Any portfolio characteristics and
holdings referenced are subject to
3 https://www.rlam.co.uk/ change without notice. These are
intermediaries/our-views/2020/ included for information purposes only
esg-factors-will-remain- and do not constitute an investment
important-in-post-coronavirus- recommendation.
economy/
Unless otherwise noted, the information
4 https://www.rlam.co.uk/ in this document has been derived
intermediaries/our-views/2020/ from sources believed to be accurate
expectations-for-energy-utilities- as of December 2020. Information
just-transition-strategies/ derived from sources other than Royal
London Asset Management is believed
to be reliable; however, we do not
independently verify or guarantee its
accuracy or validity.
The views expressed are the
author’s own and do not constitute
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