Log inIs 2021 the year that repays our faith in the UK stock market? From Charlie Hancock
Stock markets during 2020 were highly polarised, with the coronavirus pandemic resulting in stellar returns for some sectors, whilst other areas of the market were severely punished. In the US, the S&P 500 index rose by 16.26% across the year, whilst the UK’s FTSE 100 declined by 14.34%. The former is dominated by technology companies which were not disadvantaged by the pandemic, as well as e-commerce businesses such as Amazon, whilst the FTSE 100 is heavily skewed towards companies in the energy and financial sectors. With demand for oil plummeting during the first half of 2020 and investors worried about issues in the banking sector, the FTSE 100 lagged its global counterparts.
During the final quarter of 2020, positive news regarding COVID-19 vaccines resulted in investors becoming more positive on sectors which had been weak throughout the year. With hopes of the pandemic being brought under control during the first half of 2021 and lockdown restrictions being significantly relaxed or removed, investors increased their exposure to more cyclical businesses. Stocks in the energy, commodities, banking and leisure sectors started to regain some of the steep declines seen during the first half of the year.
As an example of a fund with significant exposure to these areas of the market, we currently own the J O Hambro UK Equity Income fund in our portfolios. During Q4 2020, this fund returned 29.84%, significantly outpacing the technology dominated NASDAQ 100 index, which returned 13.79% over the same period. With increasingly positive news flow regarding the vaccination programme in the UK and the US, we expect some of 2020’s laggards to continue to gain interest from investors over the coming months. As a result, the polarisation of stock markets during 2020 is unlikely to be repeated, with a broader based recovery taking place instead.
The UK economy is dominated by the service industry and the economic damage from lockdown restrictions has therefore been severe. However, the speed of the vaccine rollout could result in the UK economy re-opening relatively quickly, paving the way for some areas of the UK stock market to experience a rally.
The re-commencing of dividend payments has the potential to provide a further boost for equity valuations, particularly for businesses that did not cancel dividends due to financial constraints. As an example, airlines saw revenues plummet, leaving them with no choice but to cancel dividend payments, whereas banks were told by regulators to pause dividends as a precautionary measure. Having reported much better than expected results during the second half of 2020, banks should revert to making healthy dividend payments this year.
In summary, we believe that 2021 has the potential to be a strong year for areas of the market which have underperformed in recent years. The macro-economic backdrop could become very supportive of more cyclical asset classes, with inflationary pressures likely to build once the economy re-opens and consumer spending increases. We will continue to regularly adjust our portfolios in an effort to take advantage of changing market conditions as the recovery progresses.