Three lessons from 2020

Fahad Hassan

While 2020 will be remembered for its lockdowns and the impact of these measures on the real economy, multi-asset investors ended the year weary but unscathed. My three takeaways from the year are:

1.Never fight the Fed:

The Federal Reserve’s efforts to stabilise the bond market proved to be the turning point for financial markets. The European Central Bank (ECB) and Bank of England added further fire power, but credit spreads started to narrow as soon as the Federal Reserve started buying US treasuries, mortgage securities and corporate debt. By opening up US dollar liquidity to other central banks, the Federal Reserve prevented the onset of a financial contagion after the pandemic.

2. Sterling – a shock absorber:

Ever since the Brexit referendum, UK investors have become accustomed to sterling’s volatility. While this may be hedging nightmare for large corporates, UK investors have benefited from the procyclicality of the pound. Whenever there is a shock to the global economy, sterling tends to fall in value versus the US dollar, the euro and the Japanese yen. This benefits UK based multi-currency investors and is the main reason we have chosen not to hedge our foreign equity exposures. 

3. Diversification:

Naysayers of the 60/40 portfolio were surprised once more as long duration bonds had another stellar year. The death of fixed income, a theme espoused by absolute return managers, was rebuffed once again in 2020.