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Sharpe Thinking: reflecting on 2020 – and looking ahead to 2021

What’s moving the investment landscape? In these turbulent markets, we bring you views from our portfolio managers, analysts and economists, delivered by our Investment Office – an independent body ensuring that our investment teams perform in the best interest of clients.

The end to the year is often a time to take stock and reflect on the dynamics of the previous 12 months and consider an outlook for the months ahead. This year feels different, however. With the holiday season looking severely curtailed in most countries around the world, there will likely be abundant time to reflect, but it seems as if we have spent the past nine months in some form of analysis.

When decades happen in weeks

As soon as Easter, we remarked on the prescience of the observation that “there are weeks where decades happen”1, and indeed, our real estate team noted that online penetration shifted five years in five weeks, with meaningful implications for pricing (see figure 1).

Figure 1. UK online shopping accelerates five years in five weeks (%)

Source: CBRE Research, as at May 2020.

Until earlier this year, our local high street was where many of us spend our time. But how has it fared since the onset of the coronavirus pandemic?

Our Real Estate team notes that UK retailers and hotels have shown the worst performance in the 10 months to the end of October, losing 12.5% and 6.5% in total return terms, respectively. Meanwhile, the residential and industrial segments have shown positive growth, recording total returns of 2.2% and 4.9%, respectively. This dispersion has led to a far more modest overall fall in real estate than was experienced during the financial crisis in 2008, and it is clear that it is retail, and not real estate that is the epicentre of the current crisis. The office sector has not yet shown too much negative impact with a flat total return year to date, possibly due to the longer leases in effect and a lagged effect of structural change.2

Virus vaccines offer hope for macro-recovery

Our macro economists recently issued their 2021 outlook, which focuses on the core beliefs that see a macro-recovery on the back of vaccine success, but enhanced volatility due to a shift in policy and more protectionism.

With central banks and governments likely to be firmly focused on enhancing growth in the emergence from a historic GDP slump in 2020, there is an expectation of more stimulus and less austerity, all of which will stimulate markets. At the time of writing, the outlook for the Brexit negotiations is still far from clear, and our economists expect an 11th hour deal, which would obviously boost sentiment.

Elsewhere, our Fixed Income team has noted more herd behaviour which gives them pause as it notes that profits are under pressure for many issuers, while leverage has risen.  While defaults have been very rare, with the exception of energy (which accounts for 29% of high yield defaults), the hunt for yield is driving an ebullience that they fear may not be warranted. Cautious optimism is the order of the day, particularly in the US where our team has recently upgraded its stance to overweight from neutral.

Building back better: themes to watch in 2021

The past few months have been a time of reflection and some themes are coming into sharp focus in our own research as we look to 2021. As stewardship moves to the forefront of investor sustainable investing drive, the focus on the energy transition is pivotal to the debate around engagement and divestment debate, while electric vehicles and their adoption are themes not only of our discussions with auto companies but also enable our analysts to track the readiness of emerging markets to keep pace with not only ESG expectations.

We are increasingly focused on the quality of ESG data as well as ensuring that our own taxonomy evolves to keep pace with regulatory norms. Our recently published biennial ESG investing study, which analysed correlations between companies with high ESG scores and shareholder returns since 2009, reinforced our earlier findings of a robust link between underperforming firms and poor social and governance metrics. While the governance premium remained unchanged from our 2018 study at 24bps per month on average, the social premium strengthened to 17bps. Companies are now thinking beyond their shareholders – they are thinking about their employees, customers and suppliers.

We are also intensely focused on the imperative of protecting biodiversity, as set out in SDGs 14 and 15 (life on land and life and water), and exploring how to realise this through our investment products.

As our Real Estate practice expands (and following the recent launch of our new Residential brand Hestia), we are reinforcing our commitment to get to net zero through real estate – as part of our Better Building Partners Climate Change Commitment. We are exploring ways to offset embodied carbon through carbon sequestration and have an utmost focus on energy efficiency.

Creativity and collaboration in crisis

Within our equity funds we continue to bring sustainability to the forefront of our investment goals, and our stewardship is becoming more integrated, more active and an ever more essential aspect of our value added. As thought leaders in policy and the movement around sustainability, we are continuing to innovate, to let our ever-expanding data sets inform our processes and decisions and to sharpen our focus on realising the promise that active management can bestow.

In this most difficult of years, we have seen bursts of creativity and cross-asset collaboration.  Though physically separated, our ideas and shared missions have united us in the investment office.  As we watch and seek to make sense of macro events that have evolved with warp speed, we have confirmed that the power of the collective is infinitely more than the sum of its parts.  As the vaccine rollout commences across the UK and the globe, we are looking to 2021 with a great deal of optimism, and anticipation for what our ideas can unleash.


On that note, I would like to wish all of our readers a peaceful holiday season and every good wish for the new year.

  1. 1Attributed to Vladimir Ilyich Lenin.
  2. 2Source: MSCI, as at 31 October 2020.

For information purposes only. This is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Figures, unless otherwise indicated, are sourced from Federated Hermes.

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