With 2020 in the rear-view mirror, investors are hoping that the new year will usher in greater returns for their portfolios. And while economic recovery has begun around the globe, the health crisis and subsequent lockdowns have triggered some shifts in the investment landscape that are expected to persist for the foreseeable future.
As a result, certain asset classes are poised to perform better than others. Categories like alternative investments are all the rage, especially in this environment of extremely low interest rates where it is difficult to find yield. And while there is no crystal ball for how the remainder of 2021 will play out, there are certain investment themes that the experts are touting as they navigate the new normal, such as e-commerce, sustainability, and telehealth, to name a few.
In a nutshell, widespread economic recovery is expected in 2021, especially as the COVID-19 vaccine rollouts continue and the bans on living ease. For Europe, the recovery is expected to begin in Q1 and gain momentum in Q2. As the world returns to a new normal, consumers are expected to begin spending money again.
While countries like the United States saw their stock markets rise in 2020, not every region was as lucky. European stocks suffered a double-digit decline last year. As a result, many investors are a bit skittish about returning to European stocks in 2021, not surprisingly. The COVID-19 pandemic seems to have hit European economies especially hard, as evidenced by an 11% decline in UK GDP last year. So the weak stock markets came against the backdrop of weaker growth.
Things are looking up for 2021, according to Morgan Stanley, as Europe is poised to benefit from the recovery. The firm is predicting “high single-digit returns” for European equities this year, which should outshine the performance of other regions including the U.S., Japan, and emerging markets, according to the Morgan Stanley experts. The investment environment should also be helped by the continued easing of monetary policy by the European Central Bank (ECB).
If you are wondering why not emerging market stocks, the simple answer is that European stocks are coming from a lower base and therefore there are more gains to be had, while emerging markets have already been outperforming in the past few years.
When it comes time to decide which sectors to focus on, it could help to know the investment themes that the experts are following for 2021. Below are some of the potentially hottest sectors based on the analyst community.
On one hand, there has been a great deal of excitement surrounding electric vehicles (EVs). But on the other hand, you could also argue that EVs haven’t yet lived up to the hype as adoption has taken longer than expected and the price points remain elusive for many. According to a Cowen report, however, the tide could be about to turn for EVs.
They point to a USD 7 trillion transportation industry that is poised for transformation thanks to the technologies that support electric and self-driving vehicles. So in addition to the EV makers themselves, other interesting prospects include the companies that make the batteries, for instance, or the companies behind the processing power inside these cars, which would be chip stocks.
Ford has its sights on Europe. The U.S. automaker recently poured USD 1 billion into a German EV production facility located in Cologne with the aim of introducing “completely all electric” vehicles in Europe in just under a decade. In addition, by 2026, the company plans to unveil “zero-emissions capable, all-electric or plug-in hybrid” vehicles.
Cowen predicts an acceleration in the demand for “vehicle electrification,” especially for the 2022-2025 period, saying that it could catch investors by surprise. Some of the specific catalysts for this outlook include:
- Lower renewable energy costs
- Better battery density
- Industry partnerships
Cowen also forecasts that by 2023, EVs will be less pricey than traditional internal combustion engine vehicles and by 2030 will achieve a market penetration of nearly 26%.
Environmental, social, and governance, or ESG, related investments are all the rage. There is a big push toward ESG as investors become more aware of the types of activities of the companies and funds they choose to gain exposure to. For example, major banks are increasingly distancing themselves from companies that operate in the fossil fuel space, especially coal, in favor of environmentally friendly energy production, such as solar, wind power, etc. Sustainable investing also includes diversity issues and therefore companies should demonstrate women and minorities in key leadership roles.
Big investors have already made a splash in this space, with European funds overseeing EUR 1.1 trillion in ESG assets as of the end of 2020, which is an all-time high for this market.
It can be difficult to spot ESG-friendly companies on an individual basis, especially because seemingly every corporation wants to be sustainable these days, so the definitions and parameters can vary widely. One way to measure retail demand for ESG is to consider exchange-traded funds, which are popular investment products for individuals and where momentum has been similarly strong. ESG-related ETFs attracted an eye-popping nearly USD 16 billion in investments across the globe in January 2021, as per TrackInsight data.
The number of funds comprising ESG assets has ballooned in the last six years. According to Morningstar, sustainable investments are especially popular among the millennial generation, as well as female investors. As wealth is passed down from baby boomers to young investors, the push toward ESG investments will likely only grow stronger.
The move toward e-commerce was already unfolding even prior to the pandemic but COVID-19 has sped up the trend by as much as a year, estimates suggest. And now that the paradigm shift has occurred, it is expected to be here for the long-haul. In Europe, there is a trend in which the surging demand for e-commerce has led to not enough warehouse space, which in turn has fueled an investment push into regional logistics assets, as per real estate consultant Savills.
In order for companies to ride the e-commerce wave, they must have space to store products so that they can be delivered to customers sooner than later. In 2020, the Netherlands, Poland and the UK led the way for the increase in logistics demand, and this trend is expected to persist in 2021.
Another way to view the e-commerce trend is through the lens of retailers, such as fashion, furniture/appliances, food and personal care, etc. Europe saw a peak in online retail penetration in the spring of 2020, but the growth is set to continue in 2021, as per Savills, especially in light of the second wave of the pandemic. Much of the way this plays out has to do with consumer confidence, and as it stands, households in the eurozone have been bolstering their savings, which could be a predictor of things to come.
Telehealth, or the digitalization of healthcare services, involves the use of telecommunications to deliver long-distance medical services. The global lockdowns were in place in 2020 made it impossible for patients to make routine doctor visits for non-COVID or non-urgent services. As a result, it became routine for doctors to perform telehealth visits in which visits occurred over teleconference, streaming media, and other wireless communications channels. While telehealth existed prior to the pandemic, its role in the healthcare industry increased in 2020.
The virtual environment has proven to save both time and money for providers as well as patients. Researchers suggest that the telehealth segment could grow in size to USD 175 billion in the next half-decade, fueled in part by the rise of home diagnostic devices, which send data readings on vitals from the patient to the physician electronically, such as smart scales, blood pressure kits, etc.
Many of these companies are still startups, and CBInsights has drummed up a list of some of the ones to keep an eye on. Included on the list are Latvia-based CheeksUp, which specializes in speech therapy homework, and Estonia’s Viveo Health, which focuses on telemedicine and lowering healthcare costs. Lithuania’s Softneta, which is behind software-based healthcare solutions, also made the list.
While the past decade belonged to the U.S. in terms of growth in stocks and bonds, the next decade is expected to be all about Asia. In fact, JPMorgan is calling it the Asia Decade because they believe that this is where the investment opportunities reside, across stocks, fixed income, and currencies. Fueling the trend in part is the rise of the middle class in countries like China and India.
It might seem like the travel and leisure sector is dead as a result of the travel bans and lockdown measures implemented across the globe. Not so fast, say JPMorgan experts, who suggest that the leisure and hospitality sector is poised for a comeback in the next 12 to 18 months as confidence returns.
The U.K. a Separate Asset Class?
One looming question is how Brexit will play into the economic recovery, now that the U.K.’s separation from the EU is a done deal. Lazard Asset Management suggests that U.K. stocks might warrant their own asset class now, separate and apart from the broader European markets.
What was once a pan-European portfolio comprising both U.K. and continental European stocks may no longer be relevant in a post-Brexit world. Lazard suggests treating the U.K. similar to Switzerland, noting that investors could use U.K. equities to diversify their European portfolios. If investors follow this mindset, then it could provide a much-needed boost to U.K. stocks.
Peer-to-Peer (P2P) Investments
Peer-to-peer (P2P) lending is an alternative investment that has the potential to provide returns that are uncorrelated to the traditional financial markets. Returns vary but have been known to rise to the double-digit percentage range on an annual basis and can really rev-up the fixed-income portion of your portfolio, which is no doubt in the doldrums as a result of the record-low interest rates.
P2P is a way to invest without the involvement of a middle-man, mainly a bank. Instead, investors provide loans to qualifying borrowers, who must then repay the loans with interest. The loans are generally unsecured in nature and the terms are for several years. One lender doesn’t have to fund the entire loan, as funds are typically pooled together with that of other investors on the platform. You can also invest according to your own risk profile, such as focusing on higher-grade loans.
The funds might be used for personal reasons, business, or to pay for education, for instance. Investments are generally considered “relatively safe.”
The P2P lending market grew at a CAGR of approximately 25% between 2014-2019. Similar growth is projected for the next half-decade.
In the U.K., another option is to gain access to P2P lending through your tax-friendly Innovative Finance ISA (IFISA). This is a product that lets you invest all or some of your annual ISA allowance of GBP 20,000 for the 2020/2021 period into P2P lending. In exchange, you receive tax-free interest that surpasses that of cash ISAs as well as the paltry returns that savings accounts are offering these days.
Digital currency bitcoin has been outperforming all other asset classes for the past year, having gained some 467% in the last 12-month period. Bitcoin, the flagship cryptocurrency, has outperformed rival store-of-value asset gold, whose returns hover at just below 10% in the last year. The leading cryptocurrency has also outshined other commodities such as oil, and beaten stocks hand over fist. The question on many investors’ minds is will the gains continue throughout 2021.
The bitcoin price recently hit a new all-time high of more than USD 50,000, but where it goes from here is anyone’s guess. The experts at JPMorgan have forecast that the price has more runway for gains, suggesting that it could go as high as USD 146,000, though investors might have to wait for it.
Until recently, Bitcoin was largely propped up by retail investors. But it has been attracting more institutional investors of late, with U.S. companies like MicroStrategy and EV maker Tesla directing billions of dollars from their treasury to bitcoin. Also, Estonia’s LHV Bank has reportedly made it possible to add leading cryptocurrencies bitcoin and Ethereum to your pension account, if you are willing to bet your retirement that the market will continue its bull-run.
Another trend that has taken the stock market by storm is in SPACs, or special purpose acquisition companies. SPACs are considered blank-check companies. They raise money from investors in the stock market, the proceeds from which are directed to make an acquisition — only the investors are not in on which target that company will eventually acquire. All that the arrangers of the SPAC share is the sector in which the companies they will target for acquisition operate.
While SPACs are a play on IPOs, which are largely dominated by institutional investors, retail investors have been getting in on the new trend. SPACs are raising tens of billions of dollars in the U.S., and the trend has now spilled over into Europe, where there is expected to be a flurry of activity in 2021. At last check, some 10 SPAC deals were in the pipeline in Europe for this year. So far, Amsterdam has become the go-to-market for European SPACs, thanks to the nimble nature of its regulation coupled with its status, giving the Dutch capital an edge in the eurozone.
In the U.S. year-to-date, SPACs delivered returns of slightly more than 6% on the first day on average.
When the SPAC announces its acquisitions, investors can decide whether to cash out or stay invested in the combined entity. Similar to IPOs, the tricky part for retail investors is getting in at the rock-bottom price level, which is typically about USD 10 per share.
If 2020 has taught us anything, it’s to expect the unexpected. Consider gaming retailer GameStop in the U.S. Retail investors joined forces on Reddit to outsmart the “smart money,” or hedge funds, by driving up the share price of the beleaguered company and leaving the professional traders who shorted the stock holding the bag. In the end, the stock skyrocketed some 1,700% in close to a month, only to fall 85% in a couple of weeks.
As a rule of thumb, it is important to do your own research (DYOR) before embarking on an investment strategy, whether it’s with stocks, SPACS, bitcoin or P2P. With the tailwinds of a likely economic recovery in 2021, however, opportunities should not be too hard to find.
*This post is not investment advice and the author is not a financial expert.