The one critical message for 2021

In December, markets drifted to slightly higher yields as the broader risk complex pushed higher in expectation of continued economic recovery into 2021. This capped an extraordinary year for investors, who faced extreme unknowns as they faced the pandemic. 

Thanks to generous fiscal programs and Central Bankers' final exhaustive use of conventional monetary policy combined with quantitative easing, markets have screamed higher. Risk assets and low-quality assets are enjoying substantial support from low rates and excess liquidity.

Higher quality government bonds did a remarkable job of defending and protecting portfolios once again, while also offering significant liquidity optionality in the March and April period. This is something many of our investors used to great effect, selling bonds at a premium to buy deeply discounted equities.

Interest rates remain the virus that affects all things. This leaves us baffled that many forecasters expect continued risk performance into 2021, coupled with higher bond yields. In our view, this presents a problem with the plumbing of markets. Any disruption to the "lower for longer" thesis, combined with excess liquidity, is a significant threat to risk market performance. This has validated the enormous disconnect between fundamentals and many asset valuations.

Opinion seems almost universal that nothing can go wrong as the vaccine defeats COVID-19 over the year – but we remain cautious on herding and clustering of opinion and positioning as markets just love to hunt the crowded trades and themes. Watch the video below to learn more.

Transcript

Hi, I'm Charlie Jamieson, Chief Investment Officer at Jamieson Coote Bonds, and this is a review of markets in December 2020 and a look forward into 2021. Over December, bond markets did edge to slightly higher yields, again following on with risk markets pushing to new highs, particularly in US equity markets as risk continues to push forward, and that took the total returns for bond products over the course of 2020 to a very healthy number, with our domestic fund returning a little bit over 4.5% on a net basis to investors. Similar with our Global Hedged product, a little bit over four and a half percent. And our new Dynamic Alpha product landing a little bit north of 5% return over the course of the year.

Our Global Unhedged products did end the year in negative territory, down a little bit over 3%, but that was a wonderful negative correlator with equity markets. Of course, in the chaos of March and April, there was a while there where that portfolio was up 24% intra-year. So it really is a very good left tail type protection allocation. And clearly, as risk markets are doing very well and the Aussie dollar is rising, it's going to pull back. But we know that the Aussie dollar was very, very sensitive to the way that risk markets do perform. I guess more importantly, with bonds having defended and protected, and remaining highly liquid when they were needed through 2020, we've got to look forward into 2021. And it's an incredible year to behold as an investor. I really do believe that 2021 has outcomes that are wider in impossibility than we've seen for quite some time.

We know there is a tremendous disconnect between what is happening in global economies, the way that the COVID virus continues to impact North America and Europe, these mutations that are occurring. But we also know that there is a vaccine coming, and so there's a big trade-off in markets at the moment around, can we vaccinate populations faster than this new mutation can infect them, and where will all of that land? Clearly, the material changes in the U.S. political setup with some normalcy returning to U.S. politics, we hope, and some stability with regard to the way Biden might run his administration versus that of Trump, will also be a point of great discussion. And how markets will respond, as clearly, should we be able to beat the COVID problem that we're experiencing in the Northern Hemisphere at the moment, how will economies reopen, what will that economic data look like, and what will some of that right of change data due to markets.

Things like inflation, which are clearly a rate of change function, after a period of material deflation, like we saw in the second quarter of 2020. Once we exclude that data from the basket, clearly the velocity does pick up, and we're going to see some higher inflation periods. What will happen to central bankers and how will policy respond through all of that, and how sustainable are those moves? In our opinion, we don't believe they're overly sustainable. We still think that the major secular disinflationary forces will hold. And we still believe that economies are really actually quite weak, particularly versus a 2019 type economy. But as we can all see, we're living in unparalleled times, with tremendous amounts of both fiscal and monetary policy support. And that certainly looks to be very embedded in markets. And markets are enjoying this disconnect from a lot of the macroeconomic realities of the day.

But we do note that that disconnect is very wide. And we also just caution folks around some of the narrative machine, which is clearly very powerful, very optimistic, of course, at the start of the year, as it always tends to be. But it's also quite binary in the way that people look at that the outcomes for 2020. We think that the truth is probably somewhat more in the middle, and, certainly as it pertains to fixed income, with central bankers providing continued quantitative easing and very unlikely to move interest rates, we think it will be a fairly range-bound environment over the course of the year, notwithstanding some usual market volatilities. We certainly look forward to having lots of macro discussions with you over the course of the year and talking through a lot of these issues. But I guess with a year like this, where there is so much that could possibly happen, everything does reconnect and the economy moves forward, there are frustrations with vaccine rollout, problems with the macroeconomic environment. We probably caution investors that diversification remains absolutely critical, as we've seen over the last few years.

But we really look forward to having that discussion with you and providing hopefully high quality fixed income solutions for you on the go-forward basis. Thank you very much.

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