TODAY we take a quick look at the key market events, movements and investing lessons of 2020.

The most common takeaways were:

*More money chasing fewer assets: The prices of global financial assets (that is, stocks, bonds) recovered more quickly than many people expected and somewhat out of step with economic fundamentals. This has been attributed to loose monetary policy and substantial fiscal stimulus across the developed world.

This has been a feature of the markets both pre- and post-COVID-19 – an indication that higher valuations are likely here to stay for the medium term.

*More pain next year but not insurmountable. Despite the upward price movement in the market and news of the vaccine, risks have not disappeared. Rather, the intervention of central banks and governments across the globe has eased the strained fundamentals of many companies — primarily cyclical, COVID-19-sensitive industries (eg, airlines, oil and gas, corporate REITs). While there is likely to be fall-out in some industries, the notion that the market could fall again to March 2020 lows has largely dissipated. The result is that investors must be more disciplined and prudent in the assessment of their portfolios.

The end result of most of this is that investors need to take more risks to get the same or lower returns.

The table above shows a recap of how the main indices performed this year:

The winners: “Safe haven” / “low-risk” assets such as investment grade rated bonds or Government bonds experienced sizeable capital gains and did not fall to the same extent as other asset classes in the March sell-off. Select corporate bonds from European- and US-based issuers were also winners. Many investors noticed that it was possible to buy a bond at a seemingly unexciting yield of five per cent and see the yield fall (that is, price rise) to three per cent. The combination of income and price appreciation generated attractive returns.

Commodities were also big winners in 2020. Gold was up just under 25 per cent on the year, driven by fears that the unprecedented Government stimulus would cause inflation. Copper rose over 27 per cent on the year as a result of its widespread use in electronics, and silver emerged as the most impressive winner, up roughly 48 per cent on the year.

Although the stock market looks very sexy, the outperformance was primarily driven by a few select industries — technology and the “stay-at-home” trade. This can be seen in the difference between the returns of the tech-heavy Nasdaq, S&P500, and the Dow Jones Industrial Average.

The Losers: In the face of price wars, supply gluts and lower demand induced by global lockdowns, oil was one of the year’s biggest losers. West Texas Intermediate was down roughly 21 per cent on the year. Banks in Europe were prevented from paying dividends or buying back shares, which caused share prices to tumble. However, bonds issued by these companies appreciated in price as their capital bases appeared sufficient to absorb the first few rounds of higher loan loss provisioning.

The best comebacks: Hands down: airlines, cruise ships and the travel industry had the biggest comebacks (in terms of price performance). Many large companies ravaged by COVID-19 were still able to raise money, even at the depths of the crisis. For example, Delta Airlines issued a seven per cent 2025 note in June 2020. Carnival Cruises issued bonds with coupons as high as 11.5 per cent, 10 per cent, and 9.875 per cent in April, July, and August 2020. However, Carnival recently issued a 7.625 per cent bond in December, as an indication of a shift in market perception. Similarly, Delta issued a two per cent 2028 bond in December (post-vaccine), an indication of the market’s view that the risk associated with this airline had receded. The prices of these bonds and stocks have skyrocketed post-vaccine. Whether that momentum is to be sustained into the new year will depend on the companies’ ability to sustainably generate free cash flow.

In 2021 investors should:

(1) Be wary of seemingly high yields on fixed income instruments.

(2) Try to use capital appreciation as a tool to enhance return in the fixed income asset class.

(3) Allocate a greater percentage of their portfolios to growth assets (eg, mutual funds)

Marian Ross is a vice -president of trading & investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm