6 investment trends to shape 2021

by Jonathan Adams
investment trends

While the risk of a viral pandemic sweeping across the world’s human population had been highlighted by virology experts, it’s probably fair to say a pandemic failed to feature in many trend outlooks like this one a year ago. But the Covid-19 pandemic, of course, turned out to be the defining trend of the year. That was the case not only for investors, but the world at large.

There were, however, other trends that were predicted and did have an influence. Albeit one very much overshadowed by the defining ‘meta-trend’ of the year, which wasn’t overshadowed. Brexit and the U.S. presidential election would have influenced financial markets more in a normal year, and still did have a bearing.

Trends such as the rapid progress being made in the development and application of Artificial Intelligence (AI) were also important. As were the related influences of continued developments in biotech. Just last month, AI cracked the code of how to understand and predict the shapes proteins fold into – a decades old problem for biology and solution expected to have huge ramifications in areas such as drugs discovery.

Technology trends will continue to be hugely important for investors to follow in coming years. As will the trend towards the prioritisation of sustainability in business models and technology.

And the Covid-19 pandemic will continue to influence 2021. Unfortunately, we’re not done with the active part of the pandemic yet. And the financial repercussions of dealing with its fallout will shape global economics for years to come.

While the events of the past year are a stark reminder of the limitations of forecasting major trends that will shape the world, and asset classes, they by no means show the futility of attempting. We can’t predict everything and ‘black swan’ events like the Covid-19 pandemic occur.

But there are meta trends that we can quite safely say will influence the year ahead. Many of them for far longer than that. And as investors, it is important we think about those big picture trends. Because they will influence our current and future investment strategies.

Here’s 6 trends we think will shape 2021 and investors would do well to keep in mind.

#1 Uncertainty will remain a constant

One of the biggest influences over the year ahead is likely to be how investment markets judge the speed at which the world economy recovers from the hit of Covid-19. Will vaccine roll-out mean a return to normality, such as social gatherings and mass international travel by late spring or summer? Or will it take longer than hoped for that to be possible?

In the positive scenario, sectors such as airlines, short-term accommodation, hospitality and commercial property would be expected to roar back. Though not all companies will be in a position of strength to take advantage. Those with the healthiest cash positions can be expected to thrive. Others may have suffered a fatal blow and will either be acquired by better placed rivals or even fail once government support runs dry.

The fate of ‘pandemic stocks’ like home food delivery service Just Eat and ecommerce operations such as Ocado will also be influenced by how the pandemic plays out over the year.

Investors face the challenge of whether to back one extreme or the other, which is of course risky. Or to hedge our bets with exposure to positive and negative pandemic scenarios. That’s safer but limits upside, with winners and losers potentially cancelling each other out.

Another approach would be to focus on high-quality businesses that stand a good chance of thriving in different outcomes. Consumer goods group Unilever would be one example. It is diversified, has a strong balance sheet so in a position to invest, and is well run.

Positivity

Despite the challenges that remain and the risk that positive sentiment could be quickly derailed if the pandemic takes another negative turn, 2021 also looks like it has plenty going for it. Especially against the backdrop of the year just passed.

The Covid-19 situation should improve markedly after the winter months, as warmer weather coincides with quickly progressing vaccination programs.

For the UK and Europe, Brexit uncertainty will finally be gone. While the deal agreed will provide businesses with both opportunities and challenges, the most important thing at this stage is that it provides a level of clarity missing for some years. That means companies can plan and invest.

Over in the USA, a more conventional presidency should also mean less volatility and uncertainty than the 4 years under Trump, even if markets did respond well to some of his policies, such as slashing corporation tax. But there is a feeling that Trump’s impulsiveness and divisiveness also did plenty of harm and that is now behind us.

China

Setting aside the ‘blame game’ of whether or not the extent of the Covid-19 pandemic could have been far less if China had been more transparent in its early days, the world’s most populous country will continue to grow in its influence on the global economy and financial markets. Despite being the initial epicentre of the pandemic, China was able to subsequently control it with far more success than most of the rest of the world. Particularly North America and Europe.

That means China emerges into 2021 stronger than ever. That’s reflected in its stock markets. The Shanghai Stock Exchange composite index finishes 2020 12.5% higher than where it ended 2019.

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Foreign direct investment into China was also up 6.4% year-on-year to £86 billion over the period between January and the end of October. The Joe Biden presidency is also expected to lead to improved political relations between China and the USA and a de-escalation of the trade war waged by the Trump administration.

Investors might want to consider increasing their exposure to China. This can be done either through investments in funds focused on China, such as the Baillie Gifford China Growth Trust, Allianz China or Morgan Stanley Asia Opportunity fund. Another route would be through companies that generate an important slice of their revenues in China. Good examples are drinks company Diageo and InterContinental Hotels Group, which has an expanding presence in the country.

The healthcare sector

The healthcare sector hasn’t been of much interest to investors pursuing a growth strategy for year. But that could change, starting in 2021. For a long time, healthcare has focused on ageing. But the Covid-19 pandemic has changed that.

The pandemic has accelerated the trend towards virtual healthcare technologies as well as heightening investor interest in the biotech industry. It also showed the importance of the ability of companies in healthcare and pharmaceuticals to innovate and be able to respond quickly to changing conditions.

The companies behind Covid-19 vaccines, like Pfizer and AstraZeneca, actually had poor years in 2020 because they are not expected to make much initial profit from the vaccine. And the fact that overall demand for drugs dropped as people suffering from non-Covid-19 conditions were not diagnosed, or treated in the same way they would normally have been. But they have proven themselves innovative and that will have impressed investors and bodes well for their improved performance in 2021.

Technology

2020’s digital world as we worked, and even often socialised, from home, accelerated an existing trend. And it’s expected that many of the new trends, like working from home and ecommerce growing its total share of the retail sector, will remain in place to at least some extent.

A study conducted by professional services company Alvarez and Marsal and the consultancy Real Economics found about 25% of people living in the UK expect to continue to shop in a different way (more online) even after the pandemic is over. Another study, this time conducted by the British Council for Offices, found that 62% of senior management, 58% of entry-level office works and 46% of those who normally work from an office generally, don’t intend to return to a 5-day office week.

Investors should keep a close eye on the sectors that will enable digital transformation, such as cloud computing, productivity tools, consumer electronics and online retail and entertainment. The cyber security and AI sectors will also certainly grow strongly over coming years.

Investors should be wary of trying to pick out ‘the next big thing’ when it comes to technology companies. But exposure to a well-diversified selection of early-stage hi-tech businesses with significant growth potential should be a corner-stone strategy for most long-term investment portfolios.

Sustainability/ethical investing

Investment platform company Hargreaves Lansdown, the UK’s biggest, says that money flows into ethical and ESG (environmental, social and corporate governance) funds it offers doubled over the 12 months to June 2020. Most experts expect the growing interest in ethical approaches to investing to continue to be a powerful trend in 2021.

Political focus on climate change will keep sustainability at the front of minds in coming years and companies considered the worst offenders when it comes to a proactive approach to sustainability are increasingly being punished by investors selling out. Or declining to buy in. The hit to industries such as airlines and energy this year has also supported the growing position that ‘dirty’ sectors of the economy are also among the most vulnerable. And that sustainable investing can be financially, as well as ethically, the better choice.

However, we should also be wary of writing off companies with a poor reputation on sustainability, such as big energy companies. Businesses such as BP and Shell, for example, are big enough that they will be able to pivot towards becoming clean energy providers in coming years. In fact, both have firmly committed to doing so and have promised to achieve carbon neutrality by 2050.

There will also be plenty of money in the transition to a sustainable economy, such as the building of a charging infrastructure for electric vehicles. The big oil and gas companies are likely to evolve to be front and centre of that opportunity.

As an investor, will you choose to punish the past of such companies? Or support and encourage them in transitioning to a sustainable future?

These are all big macro trends that are likely to feature prominently in not only 2021, but beyond. And they will evolve and be joined by new trends as we go. Cryptocurrencies are one trend not mentioned here individually (filed under ‘technology’) many expect to be important next year. And there will be others. But hopefully no surprises as big as the unexpected trend that dominated 2020.



Important
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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