Over the next 12 months, capital markets will be driven predominately by the offsetting effects of the COVID-19 induced economic weakness on one hand, and the extraordinary global monetary and fiscal stimulus on the other hand. The global economy will probably deteriorate somewhat over the ensuing weeks and months as COVID-19 cases accelerate further, especially following the holidays and newer strains of the virus that is developing. That said, a rapid rollout of the vaccine around the globe (especially the developed world), will likely see economic growth return to some semblance of normality. If a majority of people are vaccinated by early fall (as expected), then the second half of the year will be characterized by strong economic growth from pent up demand and very accommodative fiscal and monetary policy. This tends to be the perfect environment for risk assets. If this scenario does play out, we would expect stocks to perform well the first half of this year, as they begin to discount the economic upswing in the second half of the year.
Within equities, we could potentially see a temporary shift away from technology related stocks which have seen significant gains over the past year, to “economy opening” stocks like energy, hotels, restaurants and airlines. We also believe that stock markets in Europe, Japan and Asia which have underperformed the US for close to a decade, will take the leadership away from the US. As far as bonds are concerned, we see very little value, especially within government sectors. Bonds offer very little yield and muted downside protection going forward.
That said, we would like to reiterate what we’ve been saying for the past year: stocks and bonds are not the only game in town! We’ve highlighted over the past year some of the alternatives we’ve been investing in such as infrastructure, agriculture, private debt, and private equity, etc.
The MSCI World Index was up 14.4% for the year, the Kinsted Global Equity Pool was up 39.3% over the same time period. While we do not expect this outperformance to continue at the same pace, you just have to occasionally toot your own horn!
The Kinsted Strategic Growth Pool also had an exceptional year, ending the year up 25.7%. This pool will behave quite differently from the public equity markets given its core holding is a market neutral strategy (meaning the stock markets don’t drive its performance) complemented by a number of private equity investments. While it will take a bit of time for some of the private equity investments to start contributing to performance, we do believe they will contribute quite handsomely as there are several holdings that will likely IPO (go public) in the first half of the year.
We’re also excited about both the Strategic Income Pool and Real Asset Pool. Some of the recent private investments in the Strategic Income pool are targeting yields in the 7%-9% range with limited downside risk. Given what a government of Canada bond yields these days (~1%), those yields are quite impressive. For the Real Asset Pool, we’ve been making a number of new investments, predominately within private infrastructure. While some of these types of investments take a while to be fully funded, we believe the longer-term outlook for this pool is very promising.
While 2020 was a big challenge for the general investor, it was a great year for the majority of our investments. We are equally excited about 2021 and beyond. With that said, one has to recognize that your portfolios are incredibly well diversified outside of the public equity markets, and if the stock market delivers exceptional returns, your portfolio will in all likelihood not keep pace as that is the cost of diversification and safety. Ultimately, our goal at Kinsted is to deliver your required rate of return to achieve whatever goal you may have for those assets, with the least amount of risk. Client’s portfolios held up exceptionally well through the unprecedented economic and capital market instability experienced over the past year. We believe this is a testament that it is still possible to achieve significant diversification benefits if investors employ an independent wealth counselling firm that has access to unique asset classes managed by proven institutional specialists – ie. Kinsted Wealth.
So, what does classic rock have to do with investing? Billy Joel provided the ultimate response in writing the song “We didn’t start the Fire” - the song is an eclectic debrief of headline events during the mid to late 1900’s that were a cause of uncertainty, polarization, and mania. Let take a retrospective overview of historic events and their impact on the markets!