How would you describe 2020 as far as investments are concerned?
Luca Carrozzo (LC): After the exceptionally positive 2019, share prices initially kept moving seamlessly upwards in 2020. But when the pandemic broke out in February, equity markets tumbled. The major indices lost up to 30% in a few weeks. This was because of fears that the economy would suffer the biggest collapse since the second world war. All over the world, governments responded to the coronavirus with lockdowns, shutting down catering businesses and shops, and many borders were partly closed too. The resultant massive collapse in the economy prompted central banks and governments to take extraordinary measures. The economy was supported by numerous rate cuts and stimulus packages worth trillions. The result was an expansion of central bank balance sheets and greater levels of government debt. The reaction on the financial markets was euphoric. The measures put share indices back on track for success, and Wall Street even hit new highs. The movements on the equity market were inconsistent with the situation in the real economy, though: unemployment rates shot up, companies got into trouble and growth forecasts were revised downwards.
What was distinctive about last year?
LC: The interventions by the central banks were definitely exceptional. The balance sheet of the US Federal Reserve swelled from USD 4,200 billion in January 2020 to over USD 7,300 billion. The European Central Bank was also obliged to intervene on a large scale. Its balance sheet grew from EUR 4,690 billion at the start of 2020 to over EUR 7,000 billion at the end of the year. Other asset classes witnessed exceptional events too: the price of a barrel of oil fell into negative territory for the first time, for example. Demand for black gold declined sharply as the economy shut down all over the world. That resulted in excessive inventories, which in turn put pressure on the oil price. In April 2020, buyers of West Texas Intermediate on the futures market did not have to pay for oil but actually received up to USD 38 per barrel on occasion.
Fear and greed will once again further accentuate the trends on financial markets in 2021. There are volatile times ahead.
How do you think the market will perform in 2021?
Mario Geniale (MG): Expectations for equity markets are very high. Prestigious firms like Goldman Sachs are forecasting that the S&P 500 index will be 18% higher a year from now. Continued loose monetary policy and more aid packages could boost investor sentiment even further. But the Covid-19 crisis and its impact are not fully quantifiable, which will result in a degree of volatility again in 2021. Fear and greed will once more further accentuate the trends on financial markets in 2021. We see potential for the SMI to rise by 8–10%.
Which three equities in the Swiss Market Index would you buy for 2021, and which would you avoid?
MG: In our view, Partners Group is likely to continue to benefit from the investment crisis and improved market sentiment. The current sector rotation out of “coronavirus winners” into the “losers” may produce some very attractive opportunities to buy high-quality shares that have previously had very aggressive valuations, such as Lonza. A global economic recovery is likely to cause cyclicals such as Swatch to rise sharply. We generally prefer to avoid banks, as their problems (negative interest rates, falling margins, etc.), are set to continue. We are also negative on Swiss Re, since the dividend is once again being paid out of reserves, and Givaudan, where an estimated P/E ratio of 36 for 2021 is a huge overvaluation compared to the growth potential.
The gold price rose by 25.2% in 2020. What performance do you expect this year?
MG: We recommend holding a substantial position in gold in securities portfolios as a low-cost hedge against unforeseeable events. Given the unprecedented monetary policy being pursued by central banks and the explosion in debt, how the economy will do over the next three to five years is highly uncertain. Only one thing is for sure: whenever there is any turbulence, gold will continue to live up to the reputation it has earned over the past thousand years as the hardest currency in the world.
Where will the SMI be twelve months from now?
MG: We remain confident that the SMI can reach 11,700 this year. Depending on precisely when this level is hit within the next 12 months, investors should reassess their equity weightings and take some profits.
In light of global uncertainties, we recommend high-quality, volatility-resistant securities. Unlike high-beta stocks, such securities prove more defensive in a crisis.
Is there anything else the financial markets are concerned by at present?LC: The yield on government bonds is too low. That raises the question of whether they still belong in a portfolio. Our view is that, despite their negative yields, government bonds form an essential part of a balanced portfolio. They reduce volatility and stabilise performance. Even though it looks like the equity market is a one-way street at the moment, every bull market comes to an end eventually. Government bonds are the ultimate anchor of stability, provided investors do not compromise on issuer quality. Maturities should be spread over the short to medium-term part of the spectrum.