DECEMBER 2020 Market Update

— Dec 17, 2020


As this most unsatisfactory of years concludes another distinct narrative has emerged for Q4. In Q1 we had the emergence of the pandemic and markets panicking, from the 21st February to the 12th March (14 trading days) the FTSE 100 declined by 2,200 points (approximately 30%).

As we wrote in July, Q2 witnessed a striking rebound from those lows and across most Blackwood investment strategies the losses experienced in Q1 had been substantially recouped despite the FTSE100 remaining nearly 20% lower than before the emergence of COVID-19.

We had been able to protect your wealth and assets during the pandemic because of the following:

1) Resilience. We spend far less time trying to predict markets than we do on trying to be resilient whatever the outcome. In order to achieve this we have constructed your portfolio with the following attributes: diversification across asset classes, ample cash buffers, high quality/high liquidity sovereign debt assets and the holding of hedging assets, such as gold. These have all helped to cushion the downside.

2) We were not afraid to act when markets panicked. We called the bottom on March 18th and invested the models in risk assets (equities & alternatives) that we believe were at fire sale valuations, when many were fleeing or were forced sellers.

3) As well as selecting an appropriate time to enter markets, our choice of investments (world mining, digitalisation and healthcare innovation funds) have outperformed strongly as others recognised their growth potential.

4) After the strong rebound we have now been rebuilding the safety buffers in the portfolios: reducing equities and building cash resources.

The third quarter brought little progress against the pandemic or BREXIT, or much else as asset prices were locked by the iron grip central banks held on gilt yields (which are strongly influential on other asset prices).

The final quarter has brought the welcome relief of a vaccine that emerged like a deus ex machina to bring a conclusion to the COVID 19 over the coming months. The responses of governments around the world to the pandemic will be the subject of major study and reflection, and they will need to be. It is tempting to discuss who has had a “good crisis” but the truth is that we will not know until 3-5 years from now when the damage to the economy, mental health, children’s education, cancer and the other societal costs of the lockdown are finally measurable and can be held in the balance.

From an investment perspective the major contributor to our performance in 2020 was asset allocation. We accumulated considerable cash and defensive assets when the FTSE100 was at 7500, and we used that to buy equities and other risk assets when we called the bottom of the market on March 18th when the FTSE100 was at 5000. It was a bold call, but one borne of experience of how markets look and feel when they are panicking. It was decisively correct. Our actions since then have been more about the investment selection than the asset allocation; trying to prepare the models for the new world that will emerge after the lockdown. The investments in digitalisation, healthcare innovation and, more recently, green energy and clean infrastructure are indicators of where investors will need to be more focused. There will be a more visible dispersion between winners and losers in the future and we should not expect a rising tide to lift all boats.

We hope that you had a wonderful Christmas and that 2021 brings brighter prospects in every regard.