The importance of balance & diversification

January 11th 2021

2020 presented unique challenges to families, companies and Governments both nationally and globally and this will have a lasting impact well beyond 2021. Markets started the year positively before the Covid Pandemic created a sense of panic at the end of February resulting in major corrections of up to 33% with billions wiped off share markets. Since then markets have recovered and some have achieved all-time highs subsequently, although headwinds have been evident over worries about Brexit and the current lockdown.

The last year has highlighted the need for a diversified portfolio as not all markets and regions reacted in the same way. It also re-emphasised the long term commitment required when investing in equity markets.

One of the themes leading up to the pandemic was globalisation and the sudden imposition of lockdowns accentuated the vulnerability to supply chains and the requirement for national security in terms of healthcare, food and energy. Another consequence will be greater emphasis in future on renewables and ESG (environmental, sustainable and governance) requirements for companies.  A trend away from globalisation and increasing digitalisation will probably mean higher long term unemployment and higher personal and corporate debt levels which will be a drag on long term economic growth.

The Chancellor of the Exchequer, Rishi Sunak, stated that a bad deal on Brexit would be worse than no deal. We now have a deal and both parties are claiming that it is a good deal for them. Time will tell which is correct.

One of Donald Trump’s legacies is his attempt to address the trade imbalance between the USA and China. The indications are that a Biden administration will continue with this theme although the tone will probably change. China is now recognised as a serious economic competitor and no longer a supplier of cheap goods and labour. The change of leadership in the US has seen a weakening of the dollar in anticipation of higher taxes and more socialist policies. A weakening dollar traditionally helps Emerging Markets.

The big hope is that the vaccines will be rolled out globally and this will provide a means to move away from the unprecedented lockdowns that stifle the economy as well being a blight on social interaction.  There will be pent up demand and savings which could result in significant growth if it all goes according to plan.

In the meantime, Governments issue bonds, central banks buy bonds thus giving cash back to Governments who in turn fund public expenditure including stay at home payments – is this the magic money tree Ed Miliband was accused of inventing ?!

As ever, a well balanced and diversified portfolio investing in global equities and fixed interest is the best way to both grow and maintain wealth. Capacity for loss must be considered so that investors are not put in a position to have to realise money at short notice and potentially have to sell at the bottom of the market to raise funds. Whatever happens, volatility will continue in the medium term.

As always, if you would like to speak to us about any of the above or would like further help or advice, then please do not hesitate to get in touch with your usual Lycetts contact – telephone 0845 671 8999 or email.

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