3 Key Takeaways from Markets in 2020

Global financial markets were relatively quiet over the holiday season with the US’ S&P 500 index -0.17% last week and +14.62% year to date. European stocks were also relatively flat with the Euro Stoxx 50 index -0.07% last week and -5.39% in 2020. Locally Hong Kong stocks were -0.42% and Chinese A-Shares were +0.84% last week.

AQUMON’s diversified ETF portfolios were +0.01% (defensive) to -0.21% (aggressive) last week and +2.47% (defensive) to +12.02% (aggressive) year to date. AQUMON’s SmartGlobal HK ETF portfolio, with more regional exposure to Hong Kong/China, was +1.31% (defensive) to +14.74% (aggressive) year to date. The biggest laggers last week were Asia ex-Japan stocks (-1.06%) and emerging market stocks (-1.06%). Bonds were generally flat but high yield bonds were up +0.22%. Even though most asset classes were down we continued to see rotation into laggers with US small caps +1.58% last week but diverging investment focus remains with US technology also +0.38%.

As we head into our final Market Insights of the year, we wanted to use this time to remind investors of a few investing takeaways from 2020. 

Takeaway 1: Most assets had positive returns in 2020 but home biased Hong Kong investors should consider diversifying further

Here’s a breakdown of the year to date (YTD) returns of most broad asset classes (e.g. stocks, bonds, commodities, etc) in 2020 with US technology stocks leading the way +42.71%: 

Even though almost all asset classes, especially risk assets like stocks, outperformed (the MSCI World index is +12.75% YTD); for Hong Kong and European investors who were more home biased (mainly investing in their regional market), their markets underperformed.

The underperformance for Hong Kong stocks against global stocks this year was massive at +19.14%. If we look further back at how Hong Kong stocks fared against global stocks in the past 5 years, you can see global stocks outperformed 80% of the time for an aggregate outperformance figure of +39.51%:

 For regional markets that outperformed global stocks like the US (returning an extra +1.87% YTD), let's take a look at how 8 major asset classes have impacted US investors in this table in the past 10 years (top row is best performing and the bottom row is worst performing):

 So what does this table tell us?

1) Think about diversifying your regional and asset class exposure as an investor

With how often the top and bottom performers change every year in the table above, it shows us that it is extremely hard to predict how certain asset classes will do -- even for the US market that has been on a 10+ year bull market run. For Hong Kong investors, it makes sense to increase your international exposure in 2021 if you haven’t already done so.

2) Cash equivalents (e.g. treasuries, certificate of deposits, etc) are almost always the lowest return asset class  

So in most normal cases, investors should hold a minimal amount of cash equivalents in their investment portfolio. However, we would suggest investors hold a little more cash and cash equivalents in 2021: not for return purposes, but for protection purposes given how stock and bond correlations are elevated.  

We want to minimize situations like in March and September this year when markets sold off and both asset classes also sold off together. In 2021, be smarter with controlling your portfolio’s risk and hold a little more cash for protection. 

Takeaway 2: Staying invested has paid off so far for investors in 2020

In mid-February we saw the MSCI World index drop -34.11% (from February 14th to March 23rd). At that time, it definitely looked that investors may be in for a tough year in 2020. It was not too surprising that a small number of investors panicked and sold off part of their portfolios. What was surprising is that it only took 110 trading days (5 months 3 days) for global financial markets to breakeven back to previous market highs on February 14th:

Why is this surprising? If we look at the past 91 years of the US’ S&P index as a reference, the average time it took for the index to breakeven again (with its last peak) after reaching a bear market bottom was 2.1 years. In 2020, it only took 0.5 years:

So what does this mean for investors?

Unless you hold a very short term investment view or need cash immediately, staying invested has paid for investors time and time again. For those who just stayed invested this year (through the ups and downs), looking at the MSCI World index they would be +12.75% year to date. We think these investors would be quite happy with such investment returns to date. 

For investors who stayed calm and accumulated carefully during bouts of market weakness like we had suggested back in late February to early March and again in September, here’s an astounding figure: from market bottom to Christmas Eve, the MSCI World index is up +65.99%.

Takeaway 3: The most successful investment insight in 2020 was don’t fight the momentum

As markets become more detached from economic fundamentals and more momentum-driven since March, the two biggest market drivers were the rise of retail investors and increased monetary stimulus by the central banks.  

Readers of our Market Insights blog know we’ve been asking investors to ‘follow the cash’ since March because it is clear to us that a big reason for this recent market rebound was due to the US’ Federal Reserve (Fed) expanding its asset purchase program and pumping more liquidity into financial markets. If you look at the US’ S&P 500 return trend against the Fed’s increase in assets, they almost go perfectly hand-in-hand: 

With a mass distribution of a proper COVID-19 vaccine solution still in limbo for at least the next 6 months, stimulus by Central Banks will still be a dominant factor driving markets in 2021 as they try to bridge the economy before it can reopen.

What was somewhat unexpected in 2020 was the rise and the sizable impact from retail investors. Traditionally speaking, major markets like the US are more dominated by institutional investors. With a combination of COVID-19, ‘free’ stimulus checks, and easier access to investment accounts, retail investors surged globally in 2020. In the US, retail investors market share grew from an estimated 10.0% in 2018 to 19.5% in 2020 to become the 2nd larger investor segment (by stock order flow volume) in just 2 short years according to Bloomberg Intelligence: 

Alternative reports from Citadel Securities put the annual jump in retail users’ market share at an even more extreme +15% from 2019 to 2020. While institutional investors stood more on the sidelines from March until August when markets rebounded 30%+, retail investors dominated stock trading and ‘beat the pros’ at their own game. Earlier research by JP Morgan found that stocks with the highest popularity on trading platforms like Robinhood would consistently outperform less popular stocks. Even though they may be driven by news and herding behavior, this would suggest that retail traders currently have significant power to move markets. 

Investors should be aware the power of retail investors will likely only increase in 2021 and may inject more unpredictability into financial markets going forward.

So armed with these takeaways from 2020, what should investors do in 2021?

1) Consider taking more international exposure in 2021 particularly for home-biased Hong Kong investors

Beyond statistically getting better returns as we’ve shown above, we also feel this is a great way to position ahead for the early rotation into lagging regions and sectors for investors. Even though it likely won’t be a smooth ride, we are still constructive on financial markets in 2021 (particularly driven by outsized corporate earnings) and suggest investors can take a little more exposure in Asia which we feel as a region is better positioned to recover from COVID-19 quicker.

2) Rethink the role of bonds in your portfolio

With current correlations between bonds and stocks elevated (meaning they move less in opposite directions) and with interest rates at close to zero (or negative in certain cases) investors should be aware most bonds may not be able to provide the income and protection it once did. This means certain aggressive investors can take a more pro-risk stance (by allocating more to stocks) while general or more conservative investors consider more cash in your portfolios as protection. With the outlook of the US dollar still likely to depreciate in 2021 currencies like the Euro, British pound, Australian dollar, and even the Chinese yuan are likely better positioned.

3) Risk management is key

Whether you are diligently monitoring yourself or you have a financial or robo advisor to help you manage your portfolio’s risk exposure, please don’t forget this -- if 2020 has taught us anything, it is be prepared for the unexpected. We strongly believe market volatility will remain high until economies can fully reopen with a proper COVID-19 vaccine distributed to the masses. Since that is like 6 months (maybe more) out, it would be in the best interest for investors to manage their portfolio’s risk through careful periodic review, diversification, and controlling how much they invest.

We wanted to wish all our Market Insight readers a very happy new year in 2021!

If you have any questions, please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON. Stay safe outside and happy investing!

Ken 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s major investors include the HKUST, Cyberport, Alibaba Entrepreneurs Fund and the Bank of China International's affiliate.

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