Friday, 8th of January 2021
“No beast is more savage than man when possessed with power answerable to his rage.”
– Plutarch
________________________________________
Welcome back to all our readers! To those who took time off with the family over the past two weeks, we hope that you had a lovely winter break – and to those who soldiered on through to 2021, we salute you. Of course, this year’s celebrations were somewhat curtailed by the coronavirus. But we trust that you had some downtime and a reassuring bottle of something festive to usher in the New Year at least!
Before we turn our attention to 2021, it is worth reflecting on the year just past. There is now no doubt that 2020 (like 1929 and 2008) will go down in history as a year that changed the world. The pandemic has devastated economies, stripped our societies of their humanity, and empowered governments like never before. We have become accustomed to police enforcing a form of involuntary house arrest for the sole purpose of keeping friends and family apart, while celebrations and markers of life itself – from weddings to funerals – have been scaled back or banned. This is not normal.
And neither is the response of investors. Even the discovery of two highly infectious new variants of the virus and the imposition of fresh lockdowns across Europe in the run-up to Christmas has failed to break the momentum that took hold in Q2 and gathered pace with the avalanche of positive vaccine news in November. Indeed, many equity indices were pushing all-time highs as 2020 came to a close. The S&P 500 Index, for example, finished the year up +16.3%, while the MSCI Emerging Markets Index was up +15.8%, and the pan-European STOXX 600 Index was down just -4.0% at year-end. This hardly reflects what has happened to the economy over the last 12 months. And for those of us who favour healthy markets and price discovery as a means to allocate scarce resources in a capitalist society, positive equity index returns in the worst year for corporate fundamentals since WWII is not reassuring. Such distortions have real-world consequences – both political and economic – some of which will take time to be felt. Moreover, it is not just equity investors that have brushed off covid-19 as though it were only a passing nuisance. Credit spreads have narrowed so sharply since the Fed intervened to compensate for a liquidity squeeze in March that IG (and many HY) bonds were trading no wider at the end of the year than they were at the start. Given the scale of job losses and bankruptcies that we have seen in the intervening months (and will continue to see in 2021) how can these spreads reflect anything close to fair value? Perhaps most telling of all is that the price of Bitcoin, an asset with no intrinsic value and our preferred ‘bubble gauge’, finished the year at almost $30,000 (and has since risen to $40,000 as several institutional investors drank the cool aid). Given frothy market conditions today, it will be of no surprise to you that we looked to protect portfolios this week. Diversification, tactical hedging, and active management will be crucial going forward.
To be sure, the dying days of 2020 did bring some positive news, notably on Brexit. As the 31 December deadline approached there were constant warnings from both the EU and the UK that the negotiations were on the brink of collapse, however all came right in the end (as we predicted it would). And while the deal that the two unions have done is by no means equivalent to the pre-Brexit arrangements, it does include the most comprehensive trade agreement ever struck. We think that the UK will continue to flourish outside the EU with this deal in place, and UK assets have strongly rallied this year as the ‘Brexit risk premium’ finally narrows. Clearly, the UK’s new virus variant is a major concern – and has triggered the imposition of a stringent new lockdown in England until 15 February at the earliest – but the country is also well ahead of its G20 peers on the road to herd immunity thanks to its rapid approval of the Pfizer, Moderna, and (now) AstraZenica/Oxford vaccines. What is more, government bond yields have begun to rise around the world, and this is driving a rotation away from quality and growth equities and into cyclical and value ones (which are well-represented in UK indices). This reinforces our belief that the UK equity market will be a good place to find opportunities in 2021.
There was a correction on Monday after results out of Georgia confirmed that the Democrats were likely to take control of the US Senate (as well as the House and the Presidency) after Biden’s inauguration on 20th January, but equities have otherwise continued to surge this year so far. This is despite shocking scenes that unfolded on Capitol Hill on Thursday when Trump supporters, who have been goaded by the US President himself, broke into and began to ransack Congress. Their objective was to disrupt the certification of the Electoral College votes in favour of Biden as President (typically a formality). But they failed. Instead, the riot left five people dead including a policeman and America diminished in the eyes of the world. Following a string of resignations and a chorus of condemnation from his own party, Trump has tried to calm his supporters. But Twitter and Facebook have taken the decision to block the Donald from their platforms and many Congressmen fear that he will not go quietly. Pressure is building on VP Mike Pence to oust the Donald under the 25th Amendment. House Speaker Nancy Pelosi has promised to file impeachment proceedings if Pence does not act. We believe that the GOP are not likely to support this effort, with leaders hoping that the Donald reins things in before his term ends in two weeks’ time (which he did last night, finally accepting his defeat and pledging a smooth transition). But events are very unpredictable. Another reason to be hedged.
In April's news roundup, we look at some of the key movements and purchases including the return of US investment into the London real estate market to a ten-year high of £2 billion in Q1 2024. We also highlight some recent institutional office acquisitions in London.
In this article Neil Benjelloun, Bedrock’s Head of Private Markets, sheds some light on the growth of VC-funded purpose-driven businesses in solving the world's most pressing challenges. Sharing key insights and takeaways from a live Q&A session he hosted with Cameron McLain, Co-Founder and Managing Partner of Giant Ventures.
It is common to see members of the next generation in their 30s occupy a seat on the board of directors. This is desirable as it’s a very important interaction point with the business or the family’s assets, where they learn about strategy and create the family’s vision for the future. But as with most things, there is a good and a bad way to go about it. In this article, Maria Villax, Head of Family Strategy & Governance at Bedrock explores how next gens can prepare for a seat on the board.