The year of the V - how the stock market surprised us all

Important information: The value of investments and the income from them can go down as well as up, so you may not get back what you invest.

One letter emerged from the alphabet soup of possible market outcomes in 2020. The shape of the likely recovery was seen as: a U (slow and flat); a W (erratic); even a K (diverging winners and losers). But, right from the outset, investors hoped it might be a V, with the sharp decline in February and March reversing into an equally quick bounce back. Almost a year on, that’s how it looks. Unlike the credit crunch in 2008/9, it feels like the lasting damage won’t be to consumer demand for goods and services, or the ability of businesses to supply them. Rather the tab will be picked up by governments and central banks in the form of costly fiscal and monetary stimulus. Markets are happy to see that as a problem for another day. We may find out in due course, via inflation, austerity or tax hikes, that this relaxed view is too complacent, but we live in hope.

Source: Refinitiv, as at 31.12.20. Rebased to 100 at 1.1.20

%
(as at 31 Dec)
2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
MSCI World 8.2 23.1 -8.2 28.4 16.5

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

US and China lead the pack - but for different reasons

This year has at times felt like the ‘everything rally’. Some safe havens have struggled since March but most places you are likely to have been invested in during 2020 have delivered a decent return to investors with the stomach to stay the course. Two of the best places to have been are the world’s largest economies, the US and China, although they have got to the same place via different routes. China is benefiting from being first in and first out of the pandemic. Its no-questions clampdown was effective, and life is getting back to normal. The US has attracted investors, by contrast, with its defensive qualities. It is strong in the technology stocks that have been among the biggest beneficiaries of the new work-from-home, socially distanced world that we have got used to this year. Valuations may decide which of these two takes the lead in 2021.

Source: Refinitiv, as at 18.12.20. Rebased to 100 at 18.12.19

%
(as at 31 Dec)
2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
S&P 500 12.0 21.8 -4.4 31.5 18.4
MSCI Emerging Markets 11.6 37.8 -14.2 18.9 18.7

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Investments in emerging markets can be more volatile than other more developed markets.

2000 revisited - too far, too fast?

For most of the past 20 years, investors of a certain vintage have looked back on the late 1990s stock market bubble as a moment of collective madness. It has been the barometer of stock market excess against which everything else can be favourably compared. Until recently, that is. As the chart here shows, valuations in some markets (notably the US) have returned to levels last seen in the dot.com years. On some measures, prices have not been this frothy since 1929. The reassuring news is that high valuations like this are normal after a sharp fall in share prices. Rising company earnings quickly bring multiples down to more normal levels. The recent results season points to just that positive scenario. The big caveat is that earnings really do need to be delivered to justify current market levels. There is less room for error than there has been.

Source: Refinitiv, as at 31.12.20

Past performance is not a reliable indicator of future returns. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.

Acknowledgements:

The views in this report are derived from a variety of sources within and outside Fidelity International. They are based on the house view of the Fidelity investment team and other sources. However, the report is written for a UK personal investing audience and the ideas are explicitly linked to the Select 50 list of our preferred funds. We consider this to be the best way for our investors to implement the ideas discussed in the Outlook. I would like to thank, in particular: Salman Ahmed, Andrew McCaffery, Wen-Wen Lindroth, Jeremy Osborne, Gary Monaghan, Leigh Himsworth, Ayesha Akbar, Jeremy Podger, Neil Cable, Andrea Iannelli, Kasia Kiladis and Natalie Briggs.

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