Omnis Investments: 2021 Investment Outlook
We have identified 5 themes that we believe will drive markets and our investment decisions in 2021.
2021 Investment Outlook
18th January 2021
Welcome from our CEO
Welcome from our Chief Executive Officer,
The coronavirus pandemic made conditions particularly challenging for investors throughout 2020. After a sharp dip at the start of the health crisis, stock markets recovered relatively quickly, and some ended the year at record highs. Although many countries are starting 2021 with strict lockdowns as they fight against third waves of the virus and new mutations, investors are optimistic that mass vaccination programmes will allow economies to open more fully as the restrictions on travelling and socialising are lifted.
The rollercoaster ride reminds us of some valuable lessons about investing that stand the test of time. Perhaps the most important of these is that patience and commitment tend to reward investors over the long term. It can be difficult to hold your nerve when markets are in freefall.
Yet if you’d sold your investments during the worst days of the crisis then you’d have missed out on the strong recovery that took place over the second half of 2020.
The health crisis is also a reminder that the unexpected happens frequently, which is why it’s important to construct portfolios that can weather a broad range of different conditions. Within our discretionary portfolio service, we are able to adjust the exposures to different asset classes and geographies as the environment changes. We’re hoping that 2021 turns out to be a year with fewer surprises, and have put together this guide to explain what themes are likely to influence our investment decisions over the coming months.
Chief Executive Officer
Looking back on 2020
2020 was a rollercoaster of a year – we take a look back at some of the important news items.
Asset Class Returns
2020 was a great year of dispersion of returns between asset classes with US Smaller Companies topping the performance chart and UK Equities at the opposite end. A well-diversified portfolio with a mix of different asset classes aims to smoothen this dispersion over the medium to long term.
This chart illustrates the performance of different asset classes* for the last decade and an illustrative balanced portfolio, which has a combination of the different asset classes. Over the last decade a well-diversified portfolio gave investors a less volatile ride compared to individual asset classes.
*All returns as at calendar year end, GBP
A Healing Process
After a year when everything seemed to change, what’s likely to drive the world economy and financial markets in 2021?
A note from our Chief Investment Officer, Robert Jeffree
We have identified five themes we believe will impact markets in 2021 and influence our investment decisions as we navigate through the evolving environment. Undoubtedly, governments will be focused on their economies' road to recovery from Covid-19. The unprecedented levels of stimulus have created a moderately reflationary environment globally. We expect to see changes in the way countries trade in light of a busy political 2020. Of course we cannot forget the focus that governments will have in 2021 on regulation of the tech industry and how we can all build back better in a post-Covid-19 world.
Over the following pages you can find out more about our ideas and explore the views of some of the managers behind the funds in our portfolios.
The world economy is in recovery mode
Amidst the challenging environment between vaccination roll-out, higher infection rates and the possibility of mutations, we take a look at the investment opportunities post-Covid and any potential risks to the recovery.
The world economy is in recovery mode
Many countries have started 2021 in strict lockdowns as they fight to slow a winter surge of coronavirus infections. While we believe the pandemic will begin to recede this year and the global economy will commence its healing process, it’s likely to be a gradual one.
Vaccination programmes have started, but the logistics involved in manufacturing and distribution mean it will take time to bring the virus under control. Furthermore, bringing the virus under control is distinct from eradicating it – it is possible that seasonal restrictions may be with us for a while yet.
Nonetheless, it’s remarkable how well the modern economy has adapted over the past year when our daily routines have changed so dramatically. Looking at industry sectors more closely, we can divide them into three segments that have been affected very differently by the nature of the virus-driven recession:
- Sectors that benefited from the lockdowns, including technology, home improvements and supermarkets.
- Sectors that suffered and are directly vaccine dependent, such as travel, leisure and high-street retail.
- Sectors that were only partially impacted but which are sensitive to the policy response, such as banks, insurers and homebuilders.
This division helps us understand how different businesses are likely to perform as the economy responds to the vagaries of the health crisis. The brighter outlook following the announcement of successful vaccine trials has already rippled across financial markets. As the recovery gathers momentum, fund managers are likely to feel increasingly confident that they can get back to their normal job of forecasting company prospects in a more stable environment.
As well as differences between sectors, from a geographical perspective some regions have contained the spread of the virus more effectively than others and are bouncing back more rapidly. In particular, many Asian countries have avoided prolonged lockdowns and kept large parts of their economies open. Notably, the rate of output in Chinese industrial production had already returned to pre-pandemic levels by the third quarter of 2020.
Nabeel Abdolula | Fulcrum
Investment Manager | Omnis Diversified
OUR INVESTMENT CASE
With the recovery heading in the right direction, we’re confident about the outlook for company profits and stock market returns. We have an overweight allocation to equities in discretionary portfolios, favouring Asia and emerging markets for the progress they have made in getting back to normal, and the UK for its relatively cheap valuation and potential upside as the vaccines roll out. We remain cautious on the equity of US larger companies. They have been driven to very high valuations by a small group of lockdown winners in the technology sector, the strong performance of which, we believe, is unlikely to continue.
Reflation is the expansion in the level of output of an economy, often fueled by government stimulus, causing upward pressure on prices. What does this mean for investors?
A reflationary environment
Current state of affairs: inflation is largely absent
Over the past few years, before the pandemic in 2020, job markets in many regions across the world had been the strongest for decades, yet inflation has remained elusive.
Sourcing products at a lower price from anywhere in the world is much easier in a more globalised world.
Technological developments have lowered the costs of delivering services.
Central Bank Policy
For some time, central banks have been coordinated and succesful in their inflation targetting policies, causing an extended period of low and stable inflation in many economies.
What has this meant for investors?
Central banks keeping interest rates very low has prompted strong gains in bond markets and some parts of the global stock market.
Towards moderate reflation
We expect inflation to rise over the year, but at a moderate rate, though this will be heavily dependent on how we manage the pandemic and return to normality. According the the Office for Budget Responsibility the UK inflation rate of the Consumer Price Index is expected to be 0.8% throughout 2020, before rising to 1.2 percent in 2021, and 1.6 percent in 2022. This reflationary environment will be as a result of:
As part of their efforts to mitigate the economic damage caused by the lockdowns, central banks have been buying huge volumes of assets under their quantitative easing programmes, government spending has ballooned, and following the Democrat victory, we can expect more to come.
As economies begin their recovery from the pandemic, we may see inflation pick up in industries which were hurt more during the Covid pandemic, where there might be a shortage of supply causing consumers to place a premium on scarce products.
Meanwhile, household savings rates spiked during the lockdowns. Consumers may well spend their excess savings once restrictions relax later in 2021.
Timothy Foster | Fidelity International
Co-Investment Manager | Omnis Strategic Bond Fund
VIEW FROM THE MANAGER
I am optimistic that inflation will pick up in 2021 as a delayed response to the huge monetary and fiscal stimulus that has taken place in 2020, and as growth recovers from the Covid-19 crisis. I also expect monetary policy to stay very easy in all major economies. Although the US should recover more quickly than other regions, the recent change to the Fed’s approach (it plans to allow inflation to run above target for some time) is likely to limit any increases in real and nominal yields, particularly for bonds with shorter maturities.
The big worry for US inflation had been that rents (the largest part of the US inflation basket) would be very weak next year. However, the home-buying market has remained very strong (in contrast to the 2008 recession) and I expect this trend to support rents in 2021.
Inflation-linked bonds aren’t especially cheap, and although the fundamental outlook is positive and the asset class continues to see inflows, valuation is less compelling after a strong run in the second half of 2020. Consequently we’ve kept a small allocation to US inflation-linked bonds in the Fidelity Strategic Bond Fund. However, we favour corporate bonds, which are also supported by positive fundamentals and inflows, and should benefit from a reflationary environment in 2021.
OUR INVESTMENT CASE
In this moderately reflationary environment we favour equities over bonds.
We are cautious on potential returns for bonds. With yields already at record lows, new buyers of bonds receive little by way of income and the potential for further capital gains appears slim. As a result, we have an underweight allocation to bonds in discretionary portfolios.
We have an overweight position in equity markets. In particular we favour those sectors that benefit from a vaccine and a pick up in economic activity.These offer the best valuation opportunities.
Globalisation has become more regional
The pandemic has caused a dramatic decline in international flows — including trade, foreign direct investment and travel. How quickly can we expect global flows to rebound and how might future trade patterns look different?
Globalisation has become more regional
Supply chain policies have risen to the top of the agenda, thanks to the coronavirus pandemic and to nationalist policies such as Donald Trump’s ‘America First’ declaration. Will companies seek the greater efficiency of international diversification or aim for the resilience and political goodwill of domestic self-sufficiency? Economic logic almost always favours the former approach but protectionist politicians and concerns over weak links in extended supply chains may sometimes force the latter.
There have been some notable developments in regional integration. In November 2020, Australia, New Zealand and 13 Asian countries, including China, signed the Regional Comprehensive Economic Partnership, which is designed to eliminate a range of tariffs on imports over the next 20 years. The members account for nearly a third of the world’s population and GDP.
While the UK has been busy extracting itself from the European Union (EU), the process appears to have been positive for the rest of the region. For example, the remaining 27 countries would probably have been unable to agree the €750 billion pandemic recovery fund so easily if the UK had remained at the table. From now on, the EU is likely to be able to move faster towards its shared objectives.
In the US, president-elect Joe Biden’s economic team has indicated that it wants to address the failings of globalisation in a more internationally cooperative manner than departing president Donald Trump. Biden has suggested he wants to push international allies for help managing China and signalled scepticism about using tariffs as a weapon in trade confrontations.
Another important issue for globalisation is the potential of the internet to fragment into different parts with different regulations.
Many commentators believe the most likely scenario is a bifurcation into a Chinese-led internet and a non-Chinese internet led by the US. Such a divide is already in place to some extent, due to the ‘Great Firewall of China’, a government-sponsored programme that censors content. It means overseas businesses have to adapt or restrict their services if they want to access potential Chinese demand.
Over the next pages, two of the fund managers we hold in portfolios explain how recent trade deals could affect the balance of economic and geopolitical power between East and West, as well as the potential implications for investors.
Masaki Taketsume | Schroders
Investment Manager | Omnis Japanese
VIEW FROM THE MANAGER
The Regional Comprehensive Economic Partnership (RCEP) is a welcome development for Japan given the importance of trade in driving economic growth.
The largest benefits from the overall deal are likely to stem from the changes to a common rules of origin framework, which allows inputs of products to be made across the region to qualify for preferential treatment. But the intra-regional boost to trade as a result should be relatively modest as it mostly streamlines and harmonises existing arrangements. Tariffs were already low in the region, which itself was well integrated. In fact, 83% of the trade between the RCEP signatories was already under a trade deal.
RCEP signatories cover just under half of Japan’s trade and most of the benefits stem from the reduction to tariffs in trade with China, which it did not have a deal with before.
The geopolitical significance of RCEP is perhaps larger than the economic significance. The deal helps reinforce economic ties within Asia and also enhances China’s influence in the region. In the longer-run context of decoupling between the US and China, this is a factor that tilts the balance of power towards China. Though the deal itself was negotiated for eight years, it was signed as the US took a step back from leading international institutions and Asia has been able to better manage the pandemic than its western counterparts. For Japan, it will continue to have to work hard to balance its security and economic needs. This means continuing to navigate a difficult geopolitical balancing act between the US and China.
Ezra Sun | Veritas Asset Management
Investment Manager | Omnis Asia Pacific Equity (ex-Japan) Fund
VIEW FROM THE MANAGER
Whilst the Regional Comprehensive Economic Partnership (RCEP) is not likely to have a huge impact on, it must be noted that China had no existing deal with Japan and nor did South Korea so this is positive.
On the other hand, The Comprehensive Agreement on Investment (CAI), a bilateral treaty between the EU and China, will significantly increase market access for EU companies in China and help create a more level playing field, whils including conmmitments on climate change, labour conditions and responsible business practices amongst other items.
The CAI has rattled the US, which has taken a negative view of the deal. While Donald Trump upset many nations with trade sanctions, Joe Biden intends to consult European partners in instigating a concerted effort against what the US perceives as unfair economic practices in China. In this sense, the CAI is a win for President Xi. The reality is EU companies want to tap the Chinese market. The Foreign Direct Investment (FDI) from the EU to China over the past 20 years is a modest €140 billion. The CAI ensures that EU investors achieve better access to a fast-growing market of 1.4 billion consumers. It has largely been well received in Europe.
Biden’s victory is not likely to have a dramatic effect on the attractiveness of China as an area of investment. The names in the portfolio remain domestic in nature and increasingly focused on areas where there is an acceleration in important trends, such as digitalisation, the environment and healthcare.
OUR INVESTMENT CASE
We believe emerging markets – and Asia in particular – are best positioned to prosper in this environment, and have an overweight allocation in discretionary portfolios. One of the main reasons is that many Asian economies are becoming increasingly self-reliant, moving away from a dependency on exporting goods to developed markets. These countries offer a rich source of successful businesses across a range of sectors, from luxury goods and car manufacturers to innovative technology and financial services companies.
Tech firms face regulatory challenges
Will 2021 be the year where regulation stunts the growth of the Tech industry?
Tech firms face regulatory challenges
The crisis has accelerated many of the digital trends that were already under way. The companies whose fortunes have been most obviously lifted by the pandemic conduct all or most of their business over the internet. Other beneficiaries provide services to the home – from grocery deliveries to suppliers of exercise equipment and home improvement services.
For a large part of 2020, the US stock market rally was concentrated in the winners of the lockdown. That included behemoths like Apple, Facebook, Amazon and Netflix, as well as upstarts, such as Zoom and Peloton - all perfectly designed for remote life. Despite the market’s ascent, it has never felt like the bubble of two decades ago. In contrast to the dot-com era, the companies that moved markets last year mostly had strong earnings, while the start-ups were close to or already profitable.
Evolution of the Technology Sector in the S&P 500
While disruptive companies have the potential to keep growing their earnings by entering new markets and launching innovative products and services, policy and regulation can have a significant impact on their business models. This has been particularly true in recent years in the tech sector where Uber, Facebook, Google and Amazon have all faced regulatory challenges from governments around the world.
Meanwhile, investors are still trying to process the Chinese government’s decision in November 2020 to suspend the initial public offering of Ant Group, the country’s largest financial technology group. From Beijing’s perspective, an unregulated fintech future is one that involves the authorities having to surrender too much control. The EU and US will also have to strike the right balance in regulating the sector to promote competition without discouraging innovation.
Another issue for the large incumbent firms is market saturation. Do they have enough room to continue growing in order to justify their current valuations and the potential for further share price appreciation? For example, nearly 80% of households in the US already subscribe to Netflix, Amazon Prime or Hulu, or a combination of the three streaming services.
Jeff Rottinghaus | T. Rowe Price
Investment Manager | Omnis US Equity Leaders Fund
OUR INVESTMENT CASE
Valuations feel stretched for many of the big tech names and with looming stricter regulation, we are cautious on the short-term outlook for the tech giants compared to other sectors.
Furthermore, the announcement of successful vaccine trials towards the end of 2020 triggered a powerful rotation in stock markets. Those sectors that depend directly on the economy reopening – such as transportation, recreation and hospitality – have rebounded strongly while those – such as big tech – that are lockdown beneficiaries have lagged. We expect this trend to continue in 2021, as and when lockdown measures begin to ease.
Building back better
As governments focus on funding to tackle climate change, what does this mean for investors?
Building back better
The coronavirus pandemic has put environmental concerns and social inequalities into the spotlight, and policymakers have responded by declaring that the recovery can improve the world around us by “building back better”.
For example, the EU has earmarked around a third of its €750 billion recovery fund to fighting climate change. Hundreds of potential projects could benefit, from low-carbon steel manufacturing to electric vehicle battery production.
Other regions have made similar commitments. Japan has announced a spending package that includes trillions of yen aimed at investing in new digital and green technologies. In the US, Joe Biden’s manifesto included pledges to build sustainable infrastructure and a clean energy future. The UK government has promised to promote a green recovery with jobs in renewable energy industries. Meanwhile, China’s pledge to reach carbon neutrality by 2060 depends on extracting greenhouse gases from the air on a massive scale.
These stimulus packages are likely to create exciting opportunities for investors in some of the economy’s fastest-growing areas. Investing in well-managed companies that have a positive impact on society and the environment can make good financial sense too. They may be less likely to suffer reputational damage that can harm their share prices, and tend to be better prepared to meet future strategic challenges and take advantage of new business opportunities.
Although there’s no standard definition of what it means to invest sustainably, environmental, social and governance (ESG) factors provide a useful set of standards to assess potential investments. We believe embracing an ESG framework can help our managers to identify businesses that should be able to operate profitably and sustainably for many years to come.
Colin Morton | Franklin Templeton
Investment Manager | Omnis UK All Companies Fund
OUR INVESTMENT CASE
There are lots of ways investors can gain exposure to sectors and companies that have the potential to benefit from government spending packages and policies designed to support a sustainable recovery from the Covid-19 crisis.
We expect all our investment managers to integrate analysis of ESG risk and rewards into their investment processes and we only engage with investment managers that are signatories to the United Nations Principles of Responsible Investing, the gold standard in the wealth management industry when it comes to incorporating ESG issues into investment practice.
Over the next decade, we expect that an increasing share of global assets under management will be managed with an ESG focus.
Omnis Investments is a specialist investment company providing high quality investment solutions to clients. Our funds are available exclusively through the financial advisers of Openwork Limited and 2Plan Wealth Management.
We work with leading global investment management firms to offer a range of funds spanning different asset classes and regions. The investment managers of each fund have been appointed by Omnis following a rigorous selection process. Using a wide range of market data and expert independent analysis, the Omnis investment team oversees each of the funds, ensuring the manager delivers over the long-term against the objectives of the funds. Our funds are run on an active basis, which means the managers are free to select the individual investments they think will help them to outperform their segment of the market.
Where necessary, Omnis can appoint new investment managers on any of its funds at any point, following the same rigorous selection process. The advantage of this approach is that, should it be appropriate to replace any fund manager, this can be done without the need to move your money from one fund to another. It remains invested in the same Omnis fund and we simply appoint a new investment manager to manage the investments. The Investment Team works closely with each of the Omnis investment managers and has full visibility of the composition of each of the funds. So, as potential opportunities and threats emerge and market conditions evolve, the team understands how each of the fund managers is responding.
The Investment Team is overseen by the Omnis Board which contains a great deal of investment knowledge. Its members include senior individuals from Omnis and Openwork who are supported by external investment professionals, whose skills and expertise provide wider perspectives.
The Omnis Model Portfolio Service
The Omnis Investment Team also oversees the Omnis Model Portfolio Service (OMPS), a discretionary investment management service provided by Openwork Wealth Services Ltd, which is available exclusively through financial advisers of Openwork Limited and 2Plan Wealth Management.
OMPS aims to keep your investments aligned to your financial goals and deliver the right outcomes for you on a long-term basis (which we define as at least five years), whilst seeking outperformance through an active asset allocation approach. Our investment team constantly monitors the global market environment and adjusts portfolio exposures to take advantage of the most compelling investment opportunities
At the heart of our investment approach is a focus on maximising returns from well-defined levels of risk. Each of the portfolios has what we call a ‘strategic asset allocation’. This is the framework for the mix of the diverse types of investments in each portfolio. The aim is to provide the level of diversification we consider appropriate to deliver strong returns while always staying true to the portfolio’s risk profile. The portfolios then invest in the various actively managed Omnis funds.
The asset allocation of each portfolio can be adjusted by the investment team to reflect market conditions. The investment team considers the asset allocations on an ongoing basis and may adjust these as it deems necessary. This active or ‘tactical’ management is what really sets OMPS apart from more static types of investment portfolios; it is through making these regular adjustments that additional outperformance may be achieved.
The portfolios in comparison
Below are illustrations of the strategic asset allocation of each of the portfolios*.
Robert Jeffree, Chief Investment Officer
Robert joined Omnis in 2020 having begun his career at HSBC Asset Management’s in 1995. He initially joined as an investment analyst before training as a fund manager on the European equities desk. After 3 years at HSBC, he moved to McKinsey as an investment management consultant. In 2004 he joined New Star Asset Management as a fund manager for their MultiAsset and Asia portfolios.
Colin Gellatly, Deputy Chief Investment Officer
Colin has over 14 years’ experience in investment management, the past 7 of which have been spent at Omnis. Throughout his career, he has specialised in tactical asset allocation strategies for multi-asset portfolios, as well as being heavily involved in fund manager selection and portfolio risk analysis.
Jonathan Gosling, Investment Manager
Jonathan Gosling joined Omnis in 2017 from Towry Investment Management, where he focused on the firms' fund manager research efforts and helped formulate asset allocation and investment strategy. At Omnis, he works closely with our third party investment managers to monitor the management of the Omnis funds and is instrumental in the selection process of new managers.
Rohit Vaswani, Client Portolio Manager
Rohit has over 13 years’ experience in financial services, in a variety of roles. He began his career at Fidelity International, working with investors globally to provide investment solutions and more recently worked with fund managers and fund buyers at Portfolio Adviser, a leading UK-based investment publication.
Luke Parsons, Investment Analyst
Luke joined Omnis Investments in 2018 with a focus on fund and market research. Luke works closely with Jonathan on the manager research process, provides perfromance analysis of our funds and portfolios and contributes to the macroeconomic analysis and tactical asset allocation processes.
William Jones, Investment Analyst
William joined Omnis Investments in 2019 with a focus on research and fund analysis. William undertakes risk analysis for our funds and porfolios and assist the wider team in the investment manager oversight.