2020 has been an eventful year of the rat. The Covid-19 pandemic has driven economies into deep recession, but the record levels of intervention by central banks and governments around the world were able to spur the economies to the shallowest of recoveries.
In spite of the pandemic, global equities performed surprisingly well at large. Across major markets, Asia ex Japan equities have led other regions in terms of performance in 2020 – registering a total return of 25 per cent against MSCI World’s 16 per cent (in US dollar terms).
Out of 221 equity funds on our platform, 199 (90 per cent) of the equity funds on our platform posted positive returns while the only 22 recorded negative returns. On average, equity funds returned 17.4 per cent in 2020.
Fun fact: How were stock returns in past Year of ‘bulls’? According to traditional Chinese calendar, 2021 is the Year of the Ox, other Years of the Ox in recent history include 1949, 1961, 1973, 1985, 1997 and 2009.
For this article, we will be looking at the Dow Jones Industrial Average and S&P 500 performance due to their longer track record and data. As shown in the table below, Dow Jones Industrial Average and S&P 500 returned positively on five out of six occasions.
On average, the Dow Jones Industrial Average returned 14 per cent, while the S&P 500 returned 15 per cent.
MSCI World Index, which has a shorter history, returned positively on three out of the four occasions and 18 per cent on average. In particular, 2021 is the Year of the Metal Ox. The last time Metal Ox came about was 60 years ago in 1961, when the Dow Jones Industrial Average and S&P 500 were up 10 and 14 per cent respectively.
Will 2021 be a year of bull?
2020 marks the end of the decade-long global economic cycle post 2008- Global Financial Crisis. Investors who have held on to their fund investments through the twists and turns of the cycle would have likely doubled their initial outlay.
As we embark on the next cycle, the big question is will 2021 be a year for the bull?
At iFAST, we are proponents of fundamental and value investing, rather than feng shui. With valuations across equity markets now propped to heady levels, we argue that earnings and fundamentals will start to matter again once the global outlook regains clarity in 2021.
We believe it pays to be more selective and FY21/22’s earnings will provide guidance into our search for value.
In our opinion, equity markets which can deliver robust earnings rebound in FY21/22 should minimise de-rating risks and drive further equity returns. With the virus uncertainties and peak Covid-19 fears hopefully behind us, we increasingly expect investors to focus on corporate earnings.
Rounding the bend into 2021, we favour Asia (particular China, Taiwan and South Korea) and emerging markets (EMs) over developed markets like US and Europe.
Cyclical Asian EM markets offers a good risk-reward profile, given that they have yet to catch up to global equities. Although Latin America and EMEA equities offers potentially higher upside, investor should note that they will be taking on a higher risk should they choose to invest in them as fundamentals of Latin America and EMEA equities are not as strong relative to Asian equities in the prevailing environment.
Overall, our top five markets for 2021 are China, South Korea, Taiwan, Indonesia, Brazil.
Historical Year of the Ox and stock market performance
Source: Bloomberg, iFAST compilations as of January 14, 2021 in US dollar terms with dividends reinvested
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