Annual Review & Outlook - 4th Quarter - 2020
It has been EPIQ’s custom and discipline to begin the new year with a candid review of the past coupled with a fresh and thoughtful preview of the year ahead. Twelve months ago, we couldn’t have predicted the spread of a global pandemic, nor the impact it would have on lives and lifestyles, and the volatility it would force on economies and markets. While the year has been sobering for many, those investors who turned uncertainty into opportunity were well rewarded.
Rearview Mirror
By year-end, public market equities, domestic and abroad, delivered impressive results in many sectors even though underlying conditions were tenuous at best. Significant inflation in asset prices can only be attributed to unprecedented response from governments and central banks around the world; ultra-low interest rates and a congress willing to directly support wide swaths of the economy. Stocks, bonds, and real estate are all at record levels, yet earnings and revenue, by and large, remained stagnant or declined for many businesses, and consumer confidence remains guarded.
Still, the pandemic, racial unrest and a most dramatic presidential election aftermath were not on our nor anyone else’s radar screens a year ago, and not surprising, most of our market predictions for 2020 proved to be either wrong or directionally correct but off base. On a positive note, at EPIQ, we thoughtfully timed adjustments out of and back into equity markets as uncertainty dominated sentiment in the spring. We also opportunistically initiated several portfolio positions that serendipitously drove investment performance. The fixed income market has been a more challenging environment for all, though we identified a few select issues that led to superior total returns. While our predictions may have been off, execution and agility carried the day. We are pleased with where EPIQ portfolios ended the year.
Brief Review of 2020 Predictions
We finished 2020 with an accuracy score of just 1 for 7.
· Global GDP accelerates closer to 5%, however, the US remains stagnant at just over 2%. Preliminary results aren’t yet available, but the statistics will not capture the effects of the pandemic or volatility of global markets.
· Equity returns from Asia and Europe (+15%) will top those from the US (+8%). Although directionally correct, we missed on magnitude and relative performance. US stocks rose 21% and foreign stocks climbed 11% in USD.
· Inflation remains stable at 2.3%. An aggressive prediction at the time, US CPI ex Food & Energy came in at 1.6%. This is hard to comprehend with the rising cost of items such housing and healthcare, just to name two.
· Emerging market debt outperforms US government and corporate bonds. JP Morgan Emerging Market Bond Index returned 5.8% versus nearly 7.5% for Bloomberg Barclays US Aggregate Bond Index.
· The FOMC does not adjust the target Fed Funds Rate. This prediction bucked market sentiment, which at the time priced in a ¼ point reduction…then came the pandemic.
· The UK Brexits and it proves to be far less disruptive to the UK and EU economies than feared. BREXIT occurred with an hour to spare on December 31st. Disruption TBD.
· Amazon and Berkshire Hathaway will both announce large acquisitions. Another miss. Amazon continues to grow organically and Berkshire ended the 3rd Quarter with $145 billion in cash.
Looking Ahead
We began writing this letter before stock prices reflected Georgia Senate results and the January 6th Capital insurrection. Given the market’s continued and remarkable strength, consensus is that a ‘unified’ government, one where all branches are led by one political party, albeit with a thin margin, represents a healthy change. Optimists muse that: no more time will be wasted fighting approval of political appointees; infrastructure spending and climate change initiatives will accelerate; inflation will be held at bay; interest rates will remain low. If policies remain supportive, favorable market conditions will continue, but the averages do not tell the whole story. The performance dispersion for individual companies and sectors is as wide as it has ever been. Those who did not have enough exposure to technology and healthcare sectors would have lagged significantly in 2020; that sector preference could easily change. These are a few of our macro considerations in 2021.
Random Thoughts
We are taking a year off from publishing an economic forecast, but instead will share our EPIQ team musings—the topics we cover as a team on a regular basis as we work together to optimally position our clients’ investments.
· It is difficult to imagine a scenario where interest rates rise materially. Thus, it will be extraordinarily challenging for rates to ‘normalize’ without causing significant disruption; the only cure itself, is lower rates. This circular feedback loop leads us to remain reluctantly bullish supported by higher multiples but greater volatility.
· Traditional savers will continue to see their wealth slowly evaporate as inflation outpaces nominal interest rates. Government statistics indicate that inflation is stubbornly subdued, running well below a 2% target rate. Yet, consumers faced with housing, healthcare, education expenses find cost rising at multiples of the official rate.
· We are likely in the third inning of what is hoped to be a once-in-a-century pandemic. Coordinated stimulus response should ease the continued pain. Looking beyond currently available vaccines, several others are on the horizon, inspiring confidence in continued total return opportunities in pharma and healthcare.
· Business has awakened to racial and gender inequity at the leadership level. And where businesses are passive, activist shareholders are pushing for greater board and executive diversity. Lawsuits have been filed against several S&P 500 companies pushing for board change. It is still too early to tell how this will impact the public markets, but if shareholders start voting with their feet, we will see a new variable affecting valuations.
· Areas of new and continued focus for EPIQ include: inflation hedges (e.g. Cryptocurrency, gold, hard assets, real estate); equity Income ideas (e.g. opportunities in the pharma, financial and industrial sectors); derivative opportunities in electric vehicles, solar energy/infrastructure, and water; AgTech and other means of applying technology to food/agriculture markets.
The investment landscape will continue to adjust just as our economy and society morph. Not all changes are beneficial, but as we solve one problem, new ones are discovered. We leave this letter on a positive note. Locally and nationally, we are facing significant political, societal, and economic pressures. They may seem daunting, but we have always found a way to move forward, keeping alive the dream of better prosperity for all.
EPIQ Happenings
We are thrilled to announce:
- Rachael Scherer, CFA has joined EPIQ as a Senior Advisor. Rachael brings a depth and breadth of experience that will benefit everyone in the EPIQ sphere. From her time as an equity research analyst, to a storied career at an international corporation and ownership in a 3rd generation family business, Rachael will bring wisdom and process to all our endeavors. Welcome Rachael.
- Ben Frey, CTP is now an owner/partner at EPIQ and serves as Chief Operating Officer and Chief Compliance Officer. Ben’s contributions have proven invaluable over the past several years and we could not be more confident in his abilities going forward. Congratulations Ben. We are fortunate to have you on the team.
Please contact us to continue the conversation. Wishing you a healthy and prosperous 2021!
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EPIQ Partners
Daniel Aronson, CFA Bruce Langer, CFA Ben Frey, CTP Rachael Scherer, CFA Julie Ellison