“The optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”

James Stockdale

When we look back at 2020, we could be forgiven for hoping 2021 would be less dramatic. As we come to the end of January there seems to be none of that yet.

In the US, the Republicans were expected to hold the two Senate seats in Georgia, instead they went to the Democrats providing a clean sweep, but not enough to make any radical policy decisions.

The storming of Capitol Hill seemed to be the final nail in the coffin for Trump and it seems almost impossible for him to come back from this, especially as his former friends and associates seem to be quickly distancing themselves from him. But never say never!

The risks of more China / US trade tensions have lessened as China has cemented relations through the RCEP which a trading bloc of 15 nations, and then the EU / China Investment Agreement weakening the US position, as its allies side with China. 

As we come to the end of the month, we saw market volatility and Aviva shares some thoughts in this update on the causes and why GameStop may be partly to blame.

Finally, we had a fascinating update from ‘the Conversation’ (https://theconversation.com/uk) about COVID variants and vaccines. There is a battle looming over vaccinations, but the UK remains one of the best performing countries in terms of rollout. All eyes are on Israel who are far ahead of the rest of the world and indications are that infections reduced rapidly after two weeks.

Johnson and Johnson have announced details of their single dose vaccine and Novavax announced their successful trials for a vaccine likely to be used for the younger population in the UK.

Although this seems a long dark winter there does appear to be light at the end of the tunnel. We await the announcements on a road map but at the start of lockdown in 2021, the indications were that schools would re-open after Easter, hospitality in May and some form of normality by June. Perhaps holidays overseas from July are possibilities rather than pipe dreams (many fingers crossed). It is expected that vaccinations will have been given to the most vulnerable (20% of the UK population) and key workers by mid-February and over 50s by the end of March/early April, which would be an incredible achievement.

On the other side, consider the ‘Stockdale Paradox’, regarding James Stockdale who was a prisoner of war in Vietnam for over 5 years. He attributed survival to understanding that he was in a dreadful situation and would be for some time, but that one day he would be free. He never put an end date to freedom because he believed hope was the killer.

A similar theory was held by Viktor Frankl who was a Holocaust survivor, who observed that most prisoners died around Christmas. He believed they felt such strong hope they would be free by Christmas, that they simply died of hopelessness when that did not turn out to be true.

We can apply this to the current situation with COVID. We live in a world where we need a clear path; we want to know when things will get back to normal and so we demand a timeline to freedom. Whether it is this month, next month or the month after, if we pin hope on a date, we will likely be disappointed. The point is that the UK may not have approached the pandemic in the best way, but it is leading other countries in its vaccine programme and this helps to provide our route to normality.

If we take any of the thoughts from Stockdale and Frankl and we accept the situation is difficult, what we know with certainty is that one day we will return to normal (whatever that might be).

Aviva Investors (Global Team)

Understanding GameStop.

  • It is a bricks and mortar retailer selling video games on the high street. With digital downloads and competition from Amazon it is an endangered business model, although potentially the business could be turned into a hub for gaming enthusiasts
  • Hedge funds were betting on the share price going down (shorting) and the share price had dropped to around $5, last week this had risen to $500 at one point. The company itself is not worth this
  • However, hedge funds have lost money and must cover their losses, which means selling some of their long book (i.e., normal shares). Managers are making things worse by looking at the long book of those companies who have had to sell and shorting those managers’ long books!!! This creates volatility and in part is what is rattling markets
  • It is important to add that GameStop is not the only reason for the volatility as markets had risen sharply and there will naturally be a correction. This is likely to be short term and an opportunity to buy into stocks at cheaper prices

The value of Tesla and other EV manufacturers:

  • Tesla is the value of the five biggest vehicle manufacturers in the world with cash left over. The top 3 Chinese EV manufacturers are bigger than Ford and VW. The EV market both listed and unlisted is being hyped
  • This seems to be on the basis that the existing manufacturers have a stranded asset base and workforce which have no place in the new world
  • However, VW EV sales are expected to outsell Tesla in the next couple of years and many of the new start-ups are working with the incumbents. The likes of Ford, GM and Hyundai have seen their share prices increase by 40% in the last few months and they remain cheap
  • There are other opportunities which are being missed by the market – there are only three companies which produce semi-conductors to the EV market, and these companies remain considerably cheaper than the EV heroes. The other area is infrastructure for example in the UK National Grid, which needs to build out the infrastructure to support the growth

The Conversation

Panel discussion on COVID-19

  • Recognised strain is SARS COVID 2 and COVID-19 is a variant of that strain
  • We are seeing variants of concern – can it spread faster, can it remove efficacy of the protection we have, is it more likely to infect people and cause death and does it impact the ability to test
  • Finding variants of concern are like find a needle in a haystack. Much of the work comes from virus genome sequencing and just because a variant is found in a country does not mean it comes from that country
  • Not all countries are using sequencing and sharing of data remains poor, which needs to get better otherwise long term will cause problems
  • Identifying a variant of concern requires detective work – in the UK it started in an area with similar lockdown to the rest of the country so the questions were around compliance; whether a certain event had happened or whether it was a variant of concern
  • Vaccine manufacturers can test new variants to see if they can be neutralised. This may mean tweaking the vaccine, introducing a third dose etc. If they must produce a new vaccine the speed will be a lot faster than the first time
  • Preparation for a pandemic has been in place for 20 years and this has paid off
  • It is right that more people get the first dose, rather than smaller number of people getting both doses as this gives a better fighting chance of driving down the toll on the UK and is the right thing to do currently

Invesco – The Future of US-China Relations

A fascinating insight to the history of the US and China Relations and what the future might hold. Featuring Dr Simon Taylor from the University of Cambridge and David Chao who is a Global Market Strategist at Invesco.

Below are some of interesting points from Dr Simon Taylor:

  • The first easing of US/China relations started in 1972 when Nixon met Mao. In 1979 President Carter authorised full diplomatic relations. In 2000 President Clinton set up normalised trade relations and in 2001 China joined the WTO
  • However, as China’s economy started to accelerate doubts started to creep. With President Obama condemning IP theft. In 2016 the US identified China as an economic threat to US manufacturing jobs (although US manufacturing jobs had been in decline since 1944)
  • The ‘Made in China’ pledge heightened the worries for the US, and then in 2018 we saw the trade war start and this remains unresolved
  • Additionally, the FBI believes China is a threat to US economic and national security with evidence that by 2049 the Chinese Military will overtake the US Military. As naval operations increase there are concerns, they become riskier and an accident spirals out of control
  • Worries over a Cold War leading to a ‘hot war’ very much remain and there is a need for good leadership on both sides

Below are some of interesting points from David Chao:

  • The trade war started in 2018 and tariffs now cover 70% of Chinese goods imported to the US, and 50% of US goods coming to China. They do not think this will continue and that it will start to ease. Ultimately the trade war did not bring back jobs, as they were lost to other parts of the world and it increased the trade deficit with China
  • China has a greater focus on technology localisation and self-reliance, but it still relies on the US, Taiwan, and Korea for things like semi-conductors to roll out its 5G technology. Banning US technology has hurt, and it is assumed that China is around 15 years behind the US, but the catch-up will be swift
  • US market listing is gradually becoming less important for Chinese companies. However, in 2020 there was £13.5 billion in IPOs, the highest level since 2014. They think Biden will pull back from the hard-line response of Trump
  • Biggest risks are over geopolitics in areas like Xinjiang, South China Sea, Taiwan, and Hong Kong
  • They expect China to become the largest economy by 2028 helped by the speed of exiting COVID restrictions compared to the Western World. The trade and investment deals are important as they form trade blocs away from the US. The domestic consumption is the primary growth story and there is a feeling that reform will be needed to allow this to flourish
  • One area where the US and China can work together is over climate change as this is in the best interest of both parties  

Jupiter (Merlin Investment Team)

  • The strong market rally has in part been driven by the liquidity being pumped into the system from central banks and governments
  • There are concerns of high valuations in some parts of the market, and there are a growing number of people borrowing in the US to invest which is not a good sign
  • Over 10% of adults in the UK have been vaccinated, this is 7% in the US and 2% in the EU. UK on target to vaccinate high risk category by mid-February
  • Although there is relentless gloom now, COVID infection rates are declining in the UK and logistics have been excellent. In other areas like Germany, Holland, Belgium, and France the picture is not so positive
  • It is important to remember the new normal will be different to what we had before – trends like remote working and people buying online will continue
  • Over the next couple of years structural inflation should not be a problem, and a sustained recovery is unlikely until 2022 at the earliest and perhaps further into 2023 or 2024
  • China has been good at splitting alliances with the recent trade bloc and agreement with the EU which will make it harder for the US to contain China
  • We are now in a world where 70% of global bonds yield less than 1%

JPM (Guide to Markets Team)

  • UK and US COVID infection rates are falling but Europe has growing unrest, restrictions, and vaccine distribution
  • J&J is a single dose vaccine, and this has been tested in South Africa and could be positive for markets
  • Eyes are on Israel as they are a live test case for how effective the vaccinations are. Early signs for a single dose for the over 60’s show a rapid reduction in infections within two weeks and this will enable a gradual opening up
  • Watch out for what Biden gets for spending; expect this to be around $1 trillion, need to also watch the Fed and any comments on turning off the taps could be bad for markets
  • In terms of markets watch out for inflation, and although parts of the US and China market are elevated other areas are not, so there is regional and sector dispersion
  • There will be a rotation to parts of the market that have been beaten-up, but this does not mean that tech drops out
  • Opening economies is key to growth and this will depend on the success of the vaccine programme and whether there is a pent-up demand to spend the savings that people have accumulated
  • Areas which are likely to worry the market are vaccine failure, Fed scaring the markets and spike in inflation

Somerset (Emerging Markets Team)

Why Emerging Markets

  • EM has lagged the US, during the early stages of the virus crisis there was a further flight out of the asset class with $100 billion withdrawn with months mainly from regions outside of North Asia
  • This is starting to reverse with around $17 billion of inflows in 2021
  • There is a big gap between regions with North Asia getting back to normal whereas Latin America struggling and therefore creating a value gap between the two regions
  • There are pockets of the market that are hitting bubble territory especially EV manufacturers in China
  • However, cost of capital across the regions is low, early-stage inflation is good for emerging markets as is a weakening dollar
  • Should not discount China; it has been effective in containing the virus and the vaccine roll out, it has enhanced its trading position with the RCEP and with the EU. It is also likely to be a big player in renewable energy with a target of 84% by 2060. It is 16% of global GDP but just 3% of global fund allocation. 80% of the market is owned by retail investors and it has more quality companies than the UK and US. It has a diversified growing consumer class and by 2027 there will 1.2 bn middle class Chinese

Invesco Economic Outlook

  • The return to normality remains some way-off, particularly in Europe and is far from simple
  • Expect herd immunity in the developed world by the end of 2021 and end of 2022 for emerging markets
  • Number of people likely to take a vaccine is declining, in France this is 40% and the UK around 78%. Concerns are around the side effects and effectiveness of the vaccine
  • They believe that with 200,000 vaccines a day, the over 50’s will be completed by 12 July and with 300,000 by 9 May
  • The economic recovery is on hold and there will be more pain before things get better. The UK is expected to have a double dip recession and do not expect to get to pre Covid levels until late 2022, with unemployment peaking around 7% and perhaps higher
  • We should expect the same levels of returns as 2020 but there should be strong earnings momentum towards the end of the year which will lead to a re-rating in valuations

Lord Abbett – 2021 Investment Outlook (US)

This is focused on the US:

  • 60/40 investment significant returns in 2020 and most of that delivered in November. Feels wrong considering what has happened
  • Four factors behind the recovery – development of the vaccines delivers the promise of a return to normality by the end of 2021, the resolution of the US election, strong US earnings and China’s strong rebound
  • There is still a battle against the virus and the path to recovery is not clear. The fiscal package is crucial to how the US recovers
  • There will be a rotation to COVID losers as there is a return to normal, but this could be any time over the next 12 months
  • The vaccine highlights the power of the tech revolution and how this has benefited the bio tech industry
  • Low rates are good news for risk assets, and they expect full employment during 2022

Artemis (UK Investment Team)

Thoughts on the UK economy:

  • Vaccines provide a clear exit strategy for the UK and Global Economy
  • The UK is likely to be one of the first to exit restrictions and is currently better positioned than the EU
  • There is an expectation that restrictions will gradually be lifted somewhere between Mid-February and end of April
  • During the last 12 months income tax receipts have not really changed, and savings have increased substantially to around £1.7 trillion
  • UK consumer accounts for around 70% of GDP, and the UK consumer tends to spend rather than save
  • As life returns to normality there is an expectation that the UK could snap back very quickly as people have a pent-up demand to go out and spend
  • Companies which will benefit in the UK basically fall into four areas – accelerated structural change to digital, reduced capacity in many sectors, government focus on fiscal policy and financial strength
  • We should expect interest rates to remain low for a long time
  • Potential risk is Scottish Independence. SNP have been better communicators in this crisis and there is a great deal of support. They do not think it will be for 2 to 3 years and much will depend on the strength of the Labour party in Scotland. If it does happen then there will be certain stocks investors do not want to hold


  • Last year showed the importance of a balanced and diversified portfolio as the returns varied across region and sector – volatility is not unusual in markets, we saw this in 2016 and 2018
  • Investors do need to reconsider having a traditional 60/40 portfolio (equities/bonds) and look to a more diversified mix of low-risk assets
  • There are parts of the market that are frothy and perhaps some of euphoria needs to be shaken out but there are opportunities across the globe
  • Do not believe the markets are in a bubble territory; in a world of lower growth and lower interest rates this will favour those companies that can create growth
  • Markets are forward pricing, in the US 93% of stock prices are based on cash flow and dividend income 5 years out rather than looking at where they are today
  • Expecting recovery in global GDP not to be a 12-month recovery, but perhaps 2 or 3 years providing a long runway for recovery
  • Can see a swan effect on markets where there is a rotation into affected sectors and out of stay-at-home winners. Meaning there is not movement at the top level on the index but underneath there is movement between different share prices
  • Record savings will support pent up demand when lockdowns finally come to an end
  • There are challenges with COVID and vaccines around mutations, distribution, and duration but there is an end in sight
  • Investors should not worry about today’s equity volatility but focus on the long-term opportunities

Whitehelm (Infrastructure specialists)

We had an interesting discussion with Whitehelm and they highlighted some risks with infrastructure with the move to carbon neutrality.

Sectors at risk:

  • Coal and gas power generation,
  • Midstream assets, storage facilities, transmission pipelines (gas and oil),
  • Distribution assets (gas),
  • Railroads and ports (coal shipping and freight),
  • LNG facilities and shipping, and
  • Diesel, LPG, and oil distribution

The timescale for these to become “stranded assets” is uncertain but it may move quickly driven by for example re-financing, or investor sentiment

Where to look for potential:

  • Electricity grids
  • Sectors directly benefiting from the move to carbon neutrality
  • Europe is far ahead in the Western World, but the US will catch up if the Biden plan comes in

Articles of interest

Can Growth Go Out of Style? – click here

Stockdale Paradox: Why confronting reality is vital to success – click here

GameStop: how Redditors played hedge funds for billions (and what might come next) – click here

Climate change is a ‘global emergency’, people say in biggest ever climate poll – click here

Yes, more money will always make your life better, but that’s not all there is to happiness, says new study – click here

How we got a safe, effective vaccine in under one year — without cutting corners – click here

How Covid has changed the spending habits of households – click here

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.