Dot Thought - 2020.
2020 will be remembered as the year of Covid-19; the year of the global pandemic, lockdowns, travel restrictions, isolation. Seldom is a singular issue like Covid-19 felt so acutely around the world, affecting the lives and livelihoods of billions of people. So, it would be easy to dwell on the effects of Covid-19 and reflect exclusively on the hardships and sacrifices that have defined 2020. But just as a phoenix rose from the ashes so adversity is often a catalyst for positive change, and it is this that we at Dot hope will be the real legacy of 2020.
The key themes of 2020 are varied, from Covid-19 and its direct and indirect effects, including the acceleration of several megatrends that have defined economic progress for the past decade. We explore 3 of these themes and how they shaped markets, below.
1. Covid-19: Monetary and fiscal response stimulates markets
The novel coronavirus – Covid-19 – will define 2020 for most. From an economic perspective, the effects of Covid-related business and travel restrictions imposed throughout the world were devastating, resulting in a huge economic contraction in Q2. The global response to this contraction was equally swift and impressive, with central banks slashing interest rates and printing money in concert and governments around the world enacting policies to protect personal incomes, curtail evictions and cut taxes in an effort to restore consumer and business confidence. Some US $3.9 trillion of new money was created by global central banks and policymakers in response to the effects of Covid-19.
After markets sank in February and March, major indices rebounded sharply in April despite widespread and deep disruption to the real economy. US equity indices finished up on the year, with the tech-heavy Nasdaq up 40% YTD at this writing. Worthy of note, however, is that more than 50% of the 16% rise in the S&P 500 index in 2020 was driven by just 3 stocks: Apple (+81%), Microsoft (+41%), and Amazon (+76%). European stock markets were largely down, and among the worst performing was the UK’s FTSE 100 at -14%. Conversely, having dealt with the pandemic more swiftly and firmly, Asian equity indices were largely higher. Globally, the MSCI World Developed Market Index finished up approximately 12%, as did the MSCI Emerging Markets Index (Source: The Economist).
Much like the response following the Global Financial Crisis (2008), by setting interest rates at rock bottom policymakers encouraged consumers to spend and investors to seek riskier assets than leaving their savings on deposit or invested in low-risk government securities. Stock market indices rose as a result, and although much consumer spending shifted online because of Covid-19 restrictions, we can expect a mini spending boom on things like travel and holidays, and larger ticket items like cars, that cannot easily be purchased or consumed online, once the restrictions are lifted and life begins to return to normal.
2. Climate Change: The Greta Thunberg effect
Like Covid-19 but on a smaller scale, climate change was experienced first-hand by hundreds of millions of people in 2020, from the devasting floods in India and China; the hurricanes and wildfires in the United States; to locust swarms in Africa. All of these events have been connected by scientists to climate change. Thanks in no small part to the pioneering efforts of Swedish teenager Greta Thunberg – an environmental activist who has drawn attention to the climate crisis through her Friday climate strikes, organised and activated by school children around the world – climate change and broader Social, Environmental and Governance (“ESG”) issues have risen to prominence this year.
With increasing urgency investors, both institutional and individual, want to achieve a financial return as well as a social benefit with their investments. Asset managers and asset owners have responded by developing investment programmes that directly address a myriad of the United Nations’ 17 Sustainable Development Goals (“SDGs”). Importantly, numerous studies this year have found that companies with higher ESG ratings (i.e. better environmental, social and governance practices) have outperformed those with lower ESG ratings in 2020, revealing that both financial and social benefits may be achieved concurrently. According to Morningstar, US $80bn flowed into global sustainable funds in the third quarter of 2020, taking their global assets to US $1.23 trillion. Interest in sustainable funds is strongest in Europe but showing strength in all major western markets, from the US to Japan.
3. Resurgence of Bitcoin
Bitcoin rose 290% in 2020, peaking at close to US $29,000 after passing US $20,000 for the first time on December 16th. Three keys to the resurgence of Bitcoin in 2020 are: 1) “halving”, 2) institutionalisation, and 3) the threat of inflation. First, “halving” is the scheduled 50% reduction in the rewards offered to miners for creating new BTC. The result is that fewer bitcoins are mined, creating less supply to meet demand and thereby driving up the price.
The second factor in the rise of BTC is the institutionalisation of cryptocurrencies, highlighted by a number of companies deciding to hold Bitcoin on their balance sheets alongside cash, and PayPal’s decision to create buy-hold-sell services for cryptocurrencies, thereby making them more easily accessible to retail investors. China also piloted a digital version of its Yuan across three cities over the summer and processed over three million transactions to prove the use-case.
The third key factor is the fear of inflation. Specifically, the concern that governments are “debasing” (devaluing) their fiat currencies by printing trillions worth to support economies during the coronavirus. With the supply of traditional currencies growing virtually unchecked many expect their value to fall and are looking for a low-cost and convenient way to store and preserve the value of their savings. Cryptocurrencies are beginning to fill that need.
But Bitcoin was not the only cryptocurrency to rise in 2020. Ethereum (“ETH”), the second largest cryptocurrency by market value (after BTC), rose by 450% in 2020, driven by some of the same forces that propelled BTC’s growth, but also the announcement by the Chicago Mercantile Exchange (CME) that it would list ETH futures on the exchange in February 2021. A similar announcement in respect of BTC in 2017 led to a 3x increase in the price of BTC in the 3 months between the CME’s announcement and the listing of BTC futures. This is all part of the institutionalisation trend of leading cryptocurrencies.
As cryptocurrencies move from niche to mainstream expect the values of the more established and liquid coins to increase.
That concludes our recap of some of the themes that defined 2020 and moved markets. Our next Dot Thought piece will turn to some of the trends that we expect will drive markets in 2021.