2020 began unremarkably as markets shrugged off familiar concerns over tensions in the Middle East and between the US and China, before the coronavirus provided the first of many market jolts. These became increasingly bumpy as February fears escalated into a March melt-down when rising case numbers forced a widespread shutdown of the global economy.
Only more surprising than the speed of the market sell-off – global equities lost a third of their value in a little over a month – was the power of its recovery. Propelled by the rapid response of governments and central banks, stocks rebounded and had recouped their losses by early September, despite many countries and sectors still locked down by COVID. Rarely has the divergence between economic activity and stock market performance been so stark and despite global GDP falling 4.3%, the MSCI All Country World Index ended the year a remarkable 12 percent higher than it started[1].
Volatility itself broke new records during the March panic with the VIX index or 'fear gauge' rising above 80 points before widespread monetary and fiscal stimulus helped reduce the turbulence towards more normal levels (see figure 1). In contrast, the financial impact of these measures will endure with economists expecting global debt to have reached $277 trillion, or 365% of world GDP[2] by the end of the year, and the question is for how much longer equities can continue to defy economic gravity.
With technology and higher quality companies leading the charge, value stocks suffered their weakest annual stock market returns on record. However, hope arrived towards the end of year when the COVID vaccine breakthrough and US election result combined to provide relief for beaten-down cyclical stocks as focus shifted to economic recovery. Following a decade of underperformance, a long-overdue value recovery was underway – a rally I'm happy to say has continued into the new year.
Solid SKAGEN returns
Our equity funds experienced a similarly exciting 2020 but I'm pleased to report that all bar one ended with positive absolute returns and each recorded a record high during the year. SKAGEN Kon-Tiki and SKAGEN Focus also outperformed their respective benchmarks; reward for an unwavering emphasis on value despite often challenging market conditions. You can read more about the fourth quarter highlights for each fund using the links below.
SKAGEN Kon-Tiki returned to form and overtook its benchmark in the final straight, boosted by the value resurgence and strong performance from long-term Korean holdings, Samsung Electronics and LG Electronics. It ended the year beating the emerging market index by its biggest margin since 2013 and looks well placed for continued success.
In contrast, SKAGEN Global lagged its benchmark for the first time in three calendar years. Despite strong returns from many holdings, notably Microsoft and Adobe, the fund's financial companies weighed on performance, particularly insurers Beazley and Hiscox which faced COVID-related claims.
SKAGEN Vekst also had a difficult 2020 but recovered in the fourth quarter to deliver impressive absolute and relative gains, driven by strong performance from its cyclical holdings. The fund has also had a busy period of portfolio activity and is well positioned to continue its rally, particularly if the energy, financial and material sectors continue to flourish.
Our smaller funds had mixed fortunes. SKAGEN m² ended the year marginally behind its benchmark for the first time in five years as real estate significantly lagged broader equities in all markets due to COVID lockdowns, with the office, retail and hotel sectors hit particularly hard. The pandemic has accelerated several long-term real estate trends that the fund is well placed to exploit. SKAGEN Focus epitomised the rollercoaster ride of 2020 with our small-cap fund recovering strongly from the market lows in March to surge past its benchmark in the final quarter as company fundamentals returned to the fore.
Finally, a note on our fixed income funds SKAGEN Tellus and SKAGEN Avkasting both of which had an encouraging end to the year following the appointment of Sondre Solvoll Bakketun as Portfolio Manager in September.
Bubble trouble?
By many metrics the relentless market rise has now propelled it into bubble territory, while the clamour for bitcoins and special purpose acquisition vehicles (SPACs) is further evidence of irrational speculation and the risks that accompany hysteria. There are currently more companies priced at over 100 times their earnings than at any other point in history and 50% more than during the internet bubble at the turn of the century. The Buffett Indicator, which compares total US stock market valuation to GDP, is similarly flashing redder than at any time in history (see figure 2).
Thankfully for SKAGEN and our clients, we don't invest in the market overall and a selective approach means we can still find undervalued companies. The divergence in performance between growth and value stocks means headline multiples are misleading, evidenced by the global value index (20.1x P/E) trading at more than 50 percent below the growth equivalent (42.6x P/E)[3]. Pockets of opportunity include emerging markets, which trade at attractive discounts relative to both their historic average and developed ones, and economically sensitive sectors which were hardest hit by the pandemic. These areas of the market should benefit from stronger growth and supportive monetary policies.
The wide dispersion in returns between sectors and stocks in 2020 should bode well for active managers like SKAGEN. Equally encouraging for our clients is the growing momentum behind the value recovery, with these two elements forming the core of our investment philosophy. My final prediction is that volatility will be with us for some time – at least until COVID vaccine rollouts reach critical mass – but hopefully the extreme turmoil of last year is behind us as we all look forward to a more normal 2021.
References
[1] Sources: World Bank, MSCI (local currency returns)
[2] Source: World economic Forum
[3] Source: MSCI, as at 31/12/2020