For investors in almost everything except FTSE 100 shares, it’s been a great year. Thanks to massive support from central banks, asset prices have climbed in a liquidity-driven rally. But this support has distorted asset prices, as well as throwing fundamentals out the window. Should the US Federal Reserve keep propping up assets indefinitely, blowing a bubble on a scale last seen in the dotcom boom? Or will financial gravity finally assert itself, collapsing the economic disconnect between asset prices and the real economy? And which assets will be winners in 2021’s recovery? For me, it has to be FTSE 100’s cheap shares.
The year (almost) everything boomed
For portfolios with lots of alternative assets and few UK shares, 2020 has been awesome. US stocks lead the way, with the S&P 500 rising 12.9% and the tech-focused Nasdaq 100 doing even better, skyrocketing 42.7% in 2020. I started investing in the 1980s, so I remember well the dotcom boom peaking in 2000. For me, US mega-techs are firmly in bubble territory again today.
Alas, the FTSE 100 is the sick man of global stock markets, down 13.7% in 2020 (and 26 percentage points behind the S&P 500). This suggests that cheap UK shares could be due a resurgence in 2021.
It’s no real surprise that US stocks have outperformed other markets. As billionaire investment guru Warren Buffett once remarked, “Never bet against America”. But the prices of government and corporate bonds have also surged in 2020, driven up by near-zero or negative interest rates. Gold has had a great year. Likewise, cryptocurrency Bitcoin has nearly tripled in value in 12 months. Even UK house prices have been driven up this year, despite two lengthy lockdowns. How come cheap UK shares missed this boom?
TINA says buy cheap shares
While I worry about monetary policy blowing bubbles, I expect a broad-based economic rebound in 2021. But higher corporate earnings can’t bridge the massive gulf between asset prices and the real economy. With 2020 seeing record global debt issuance, this huge burden will weigh heavily on companies. And there’s no doubt rising bond yields or interest rates could kill off many zombie businesses. Furthermore, with bond yields at record lows or providing negative returns, I think these IOUs are no longer worth owning.
For me, TINA — There Is No Alternative — tells me that only one asset class is worth buying today. It’s the ‘last man standing’ in this global bubble — and the only one with attractive fundamentals that are not divorced from reality. In my view, cheap shares — especially unloved, unwanted, and undervalued FTSE 100 heavyweights — will be the clear winners over the coming decade. Hence, as a value investor, my focus is on finding quality companies with strong balance sheets, solid earnings and decent/rising dividends.
Finally, another investing legend, Jeremy Grantham of GMO, recently remarked, “The one reality you can never change is that a higher-priced asset will always produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both. And the price we will pay for having this market go higher and higher is a lower and lower 10-year return from the peak.” I absolutely agree, hence my high hopes for the FTSE 100’s cheap stocks in the 2020s!