James Penn, head of equity at Capital International, looks ahead to 2021

The first year of the new decade is drawing to a close – and, boy, what an experience 2021 has been!

There will still be a few people knocking around in the investment community who went through the 1987 Crash, but probably not that many.

That is now 33 years ago. One reads about it in books, or perhaps hears about it from retired participants, so it is a new experience for most to work, and live, through another full-blown crash.

But like the 1987 Crash, and unlike the Wall Street Crash of 1929, the long term effects of the sell-off have not been as severe as might have been expected at the time.

Stocks have staged a dramatic recovery, like they did after October 1987, particularly since early November when the first news of vaccines emerged.

Those who stayed out of the market, concerned about a Second Wave, are perhaps rueing their caution. The stock market seems comfortable at present to look through the current high infection rate, ‘Tier 3 restraints’, and lockdowns, and take the optimistic stance that things will get better in 2021.

A more sober perspective will conclude that this recovery has been largely – or solely – due to the fact that the Seventh Cavalry, in the form of the authorities, have staged a spectacular, bugle-blaring rescue.

I recall Anthony Bolton, the UK fund manager, saying in 2008 something along the lines of, ‘Yes, the situation is terrible, but governments and central banks have never done so much before.’

Well, in 2020 they have done even more. Taking out companies’ operating costs through the furlough scheme (or a large proportion of them, given staff wages are such a high component of costs) has been a game changer, as have working capital measures such as deferring VAT, grants, the Business Interruption Lending Scheme, and the CCFF (Covid Corporate Funding Facility).

Central banks haven’t been able to do much on interest rates, though the Bank of England cut from 0.75% to 0.1% and the US Federal Reserve, which had more scope, reduced rates from 1.25% to zero. As a result, things have turned out much better than we all expected in March.

From an investor perspective, though, assets have probably been bid up to heights that reduce potential returns going forwards.

If the economy comes roaring back next year (and some have seen a parallel to the ‘Roaring Twenties’, which followed the Spanish Flu epidemic of 1918-1920) then returns may be better.

But if it doesn’t then the scope for further gains must be limited.

For bond investors this is surely true, as bond yields simply cannot fall much further (it being a mathematical impossibility) from current levels.

Many will settle for an average, or even below average, year in 2021 – one without any surprises up its sleeve.

The opinions stated are those of the author and should not be taken as investment advice. Any recommendations may not be suitable for all, so please contact your financial adviser for further guidance. The value of investments can go down as well as up.