2020 was a highly unusual year in the equity markets, to say the least. After a brief sell-off during the early stages of the pandemic, global equities quickly recovered despite the crippling effects of COVID-19 on the economy. In the first phase of the market recovery, high-growth, high-momentum stocks were by far the best performers. In the second phase, starting in the fourth quarter of 2020, value stocks, many of which were disproportionately impacted by COVID-19, airlines and commodities, for example, rallied and are now trading close to pre-pandemic levels.
The market seems to have reached a verdict: The pandemic is last year's problem and the global economy now is on a firm path to recovery. We hope so, but at the same time, such an outcome may be overly optimistic.
The pandemic is still a global problem. Even though the U.S. and the U.K. are doing a great job vaccinating their populations, it does not offset other countries, such as Brazil and India, that are behind the curve. The end of the global pandemic hinges upon vaccinating the majority of the world population. Furthermore, it is too early to discount the lingering effects of the pandemic on the economy — weakening of government balance sheets, widening of current account deficits and building inflation from excess liquidity.
Coupled with uncertainty about the health of the global economy, we are cautious of valuations, as some stocks have already priced in a recovery. Against this backdrop, a return to fundamentals — companies with predictable earnings power at reasonable valuations — can protect investors from a storm on the horizon. We believe that carrying an umbrella when leaving home, while inconvenient when the sun is shining, is a sensible approach.