Preparing for recovery
Although economies had a tricky 2020, many large companies had a prosperous year and saw an acceleration in trends that drive their growth. In most cases we see these trends continuing, though some may ebb. No doubt we will work less from home, but we are unlikely to return to the 9-to-5 office routine and commuting five days a week. We will travel more for business, but we are unlikely to return to previous numbers of conferences. High street retail will recover, but the share of online purchases delivered direct to homes has grown permanently. We have increased the portion of the strategy that should benefit from recovery, adding Richemont, which owns the Cartier brand.
Low carbon and automation to be dominant themes
Alongside the consumer recovery, 2021 will see continued stimulus in the US and Europe. Plans for an acceleration in the development of renewable energy continue to drive our ‘Low-carbon World’ theme, though enhanced prospects are starting to be reflected in quite high valuations. In Asia, stimulus packages are encouraging businesses to automate their manufacturing and distribution plants, benefitting our ‘Automation’ theme. This area, which comprises the bulk of our high weighting to Japan, has already helped our overall fund performance but 2021 should bring further increases in sales and orders for automation equipment.
Alongside this, equity valuations are not excessive. Recent movements in the market have blown the excess from the valuations of high-growth stocks. On the other hand, growth in demand for the newer semiconductors continues apace and financial statements from the largest online companies continue to impress. 2021 may require careful selection of technology stocks, but we still expect this area to contain many of 2021’s best investments.
Increased scrutiny on ‘defensives’
We have moderated the share of our portfolios exposed to very defensive holdings. We sold Sanofi recently as prospects for vaccines are now well understood by the market and the company is likely to see little benefit from recovering economies. The shares themselves trade on a middling valuation and yield, but are unlikely to attract attention in the context of the recovery to come. Our portfolios also have little exposure to the consumer staples area, which similarly may generate little investor enthusiasm next year.
A tricky but rewarding road to recovery
From the very positive prospects seen today, various glitches and troubles will arise. Not least we expect the high hopes for the Biden presidency to be tempered by virus levels that fail to fall as quickly as everyone would like. In Europe, employment levels may prove slow to rise despite the stimulus packages. In the markets, sectors that have been abandoned by many, such as oil majors or banks may perform better next year. This will make outperformance of the index more challenging for those who focus on long-term growth.
Overall, we have been pleased at how well our investments have coped with 2020. Most end the year with higher cashflow generation, stronger balance sheets and better growth prospects. Valuations in most cases have not entirely kept up with these enhanced fundamentals. As ever, our strategy is balanced between companies in different long-term growth themes – some benefitting from economic recovery more than others – but spread across different sectors and different regions. This prudent approach to growth investing has served our investors well over the past nine years and we see no reason why 2021 should not continue that record.
