January 2021

First Quarter 2021

View from the Square

The final quarter of 2020 was as eventful as its predecessors in the year – albeit a much more buoyant one for equity investors. Two major events dominated the news in the fourth quarter and came in quick succession early in November: the US election and the announcement of the first vaccine in the fight against COVID. The latter was the big win for stocks that (like us all) were beginning to suffer from COVID-fatigue. Unlike the rally in the second quarter which was focused on a small subset of the market – notably technology and healthcare – the vaccine news led to a large market rotation into more cyclical names that the pandemic had hit the hardest. 

It is clear that vaccine progress is now a key driver for markets. The speed with which they have been produced, alongside the efficacy that has been achieved, is nothing short of remarkable. Now it is about distribution. COVID cases began soaring again in December – particularly in Europe and the US - new strains and the colder weather fuelling the spread. In recent months markets have been able to look through this with hope on the horizon for a large scale and effective vaccine roll-out. There may, however, be pockets of equity market volatility as investor sentiment ebbs and flows on latest lockdown measures and hockey stick charts cross the news wires of new infections. This could lead to investors favouring in the first few months of this year similar assets that did well in 2020 – stay-at-home stocks, Asian equities and precious metals.

Despite the deep recession experience in 2020, global equities finished the year at record highs, fuelled by demand for (now significantly over-valued) technology and equivalent “growth” stocks. The UK market, which is often regarded as a cyclical bellwether, fared poorly in 2020, ending the year in negative territory even after a strong rebound late in the year. But we think the rally in the UK market, seen in Q4 2020, could continue when economic activity ramps up in the Spring as value stocks (e.g. materials, energy, industrials, financials) make a sustained resurgence. Changes in the leading sectors (e.g. growth stocks to value stocks) are common arising out of recessions, with value tending to outperform in the early stages of recovery. Given the extent of the long-term underperformance of value stocks, we think the initial move in November has further to run in 2021. 

We begin the year relatively neutral on risk assets – looking to build up stocks that favour the economic recovery and a reflationary environment as opportunities present themselves.

Opinions constitute our judgment as of this date and are subject to change without warning. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it may go down as well as up. Interested parties should seek advice from their Investment Adviser. CS Investment Managers is a trade name of CS Managers Ltd, 43 Charlotte Square, Edinburgh EH2 4HQ. CS Managers Ltd is authorised and regulated by the Financial Conduct Authority. Registered in Scotland SC231678. Registered Office Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9BA.


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