Where to invest in 2021?

Many investors wonder where to invest in 2021 after 2020 that will be remembered as one of the most psychologically difficult years for investors. The return of volatility and an unprecedented health crisis put our portfolios and mental investment models to the test. Is there still room for improvement after the strong annual increases, or are we facing the end of the bull cycle?

If you are looking in this article for a magic ball to earn money without risk, I recommend you stop reading it. We are not fortune-tellers, nor will we try to deceive you by giving false assurances; what you can find is my vision of what situation the market is in and in what situation each asset is.

Assets or vehicles to invest in

We will review the main assets or investment vehicles that we have at our disposal, commenting on their degree of risk and how they are expected to behave in 2021. We recommend that you consult this section to find out all the options available to you.

Deposits

This option within the investment world is no longer very advisable. Risk-sensitive savers may be satisfied despite such meager compensation, but why not get enough out of savings? After all, being able to consume more in the future is something that, in general, we would all like. Years ago, the accounts came to be remunerated with a 4% APR, that a situation like this happens again seems like a distant dream. And the situation, in theory, is not going to change; it does not seem that central banks around the world are going to cease their expansionary policies to avoid an economic recession.

In the following image, you can check the forecast of the FED rates.

Even though there are negative rates in the Eurozone and the accounts are remunerated at rates below 1%, the ECB can cut interest rates even further. If we discount inflation from profitability, the depositor loses purchasing power year after year; If we want to obtain decent returns, we must do our homework and look for alternatives to deposits.

However, there will always be investors whose tolerance for risk is absolutely minimal and who will refuse to look for alternatives to deposits. Conveniently, they compare the best deposits even though the other investment vehicles may offer much more promising returns.

One of the alternatives currently available to achieve more profitability with these financial vehicles is creating a payroll account. In addition, one of the advantages of these accounts is that they offer superior returns or discounts and promotions. For this, you have to meet the requested requirements, such as a minimum amount of payroll income.

Actions

The bag is not a game. The main criteria to apply are investing in what one knows well and unnecessary money for our daily expenses. Also, if we think we have found an excellent investment opportunity, we can tolerate volatility in our portfolios. Even if there is an economic downturn, a financially healthy company will withstand the shock.

With the coronavirus crisis and the strong stock market recovery, a dystopian situation has been created. Most world economies are in recession, and there have never been so many world markets at record highs. Below I will share two images that show the returns per asset class for the last 10 years:

As we can see, the actions that suffered the most in 2020 were those related to Energy, REITs, and some highly affected regions such as Russia or Latin America.

In our opinion, these highly affected sectors are generally sources of ideas for better returns in the short term; however, the key is to find companies that can continue to grow and adapt in the long term. The dilemma for investors in 2021 maybe as I recently read to a fund manager:

Paying 70 cents for something that you think is worth 1 or paying 1.30 for something that is now worth 1 and that we hope will be worth 10 in 10 years.

It is also important that you do it with the best rates to buy shares, so we leave you a comparison of brokers for shares that can be of help.

As a summary, we can highlight De Giro for small contributions and Interactive Brokers for larger contributions. Although if you prefer national brokers to avoid paperwork and excessive bureaucracy due to being in foreign countries, you also have other options at your disposal that better adapt to your investor profile.

Bonds

Public fixed income, traditionally considered a safe asset, currently remunerates the investor with meager returns (especially in the Eurozone); in the German Bund, these become negative.

However, there will always be opportunities in this asset class, both for public and corporate bonds.

In 2020 the big winner was the convertible bond funds since they have a high correlation with equities. Still, today almost all managers agree that there are fewer and fewer opportunities and that we could be facing a bubble in bond prices. If you are looking for ideas to diversify in this market, we recommend you visit the recommendations that we will leave later.

Today, a rating in high demand is the ESG rating, which is becoming essential for many investors when making their investments.

Forex

2020 has been a year in the foreign exchange market with a strong dollar depreciation against the euro. Still, large emerging currencies have suffered major disasters, such as the Turkish lira, Brazilian real, and Argentine peso.

2021 does not seem to be a year where we see big decisions on interest rates that affect the main currencies, but we must be vigilant for the first signs of inflation. In the United States, rates soared in April, exceeding 4% of the year-on-year CPI due to the quantitative easing (QE) carried out by the Federal Reserve, which, due to the pandemic, seems to have no limits. Meanwhile, the CPI for the Eurozone reaches levels below close to 2% in the June forecasts due to somewhat more conservative monetary policies.

Commodities

A trendy asset class among traders. In the precious metals section, we have experienced strong revaluations in 2020, especially in silver. Many investors continue to bet on having a part of their portfolios in gold, and it is common for ETFs or funds that invest in mining companies to occupy a part of our portfolio. An example of these funds is Invesco Physical Gold and DWS Invest Gold, and Precious Metals Equities LC (dotbig.com recommendation).

On the other hand, there is also the option to invest in gold royalty companies. We must be attentive to the new Basel III reform that will revolutionize the financial sector.

As for oil and natural gas, without a doubt, 2021 has a better face than the disastrous 2020, where we see negative prices in crude oil and the bankruptcy of several companies in the sector.

The rebound in demand and a progressive reduction in supply are headwinds to see a rebound in the industry. However, the traditional energy sector remains among the worst 10-year categories, and ESG forces and cash flows continue to work against it. Therefore, we only see this category for very risky portfolios with a contrarian bias.

Cryptocurrencies

This asset has become quite popular in recent years; however, it carries many risks since most investors are ignorant or unaware of Blockchain technology, so you have to be cautious with fashions. This technology has the potential to change the world in many ways possibly. When? Who knows. There are too many cryptocurrencies, more than 3000, so many will not reach much in the future.

Everyone knows the cryptocurrency par excellence: Bitcoin. This virtual currency has the heads of the Central Banks restless since its implementation may put an end to the effectiveness of monetary policies. There has indeed been a lot of skepticism around this cryptocurrency, which has existed since its inception. Despite this, if we had invested in it since its inception, we would have obtained a lot of money no matter how much they said it was expensive.

For the first time, we have seen investment banks value Bitcoin, and we see more and more adoption by both companies and users.

Other cryptocurrencies such as Ethereum and Cardano stand out for their smart contracts. Ethereum is behind the NFTs so discussed lately, while Cardano is produced by green energy. Others like the Dogecoin promoted by Elon Musk through tweets remind most veterans of the investment world of past bubbles. We will see if they really have utility or if global restrictions can curb this new fever for cryptocurrencies.

In addition, there is also the possibility of investing indirectly through companies that use blockchain technology such as Microstrategy, exchanges such as Coinbase, or bitcoin miners.

The great risk of this asset continues to be the regulation that various governments and central banks suggest that they will impose in the medium term. It has high volatility to add to any portfolio.

Investment funds

Mutual funds fulfill an essential function: to channel the capital of inexperienced investors towards the financial markets.

The investor who feels confident enough to commit his money to the aforementioned assets can delegate this matter to a mutual fund. However, it is important to choose wisely how to choose an investment fund; not all funds fit our risk profile and preferences:

Active vs. passive management

First of all, we must be very clear about active management and passive management.

Once we have it very clear, we must try to avoid that; when hiring a fund, the professionals of the financial system sell us the product that suits them best. This type of attitude generates a lot of distrust towards the financial sector. Therefore, it is essential to be aware of the opposing interests. One of these deceptions is false active management. You have to be alert. A good measure is to check that the tracking error is greater than 2.

The active vs. passive management debate frequently occurs in the investment world. However, the main indices indeed obtain very positive returns in the long term despite the years in which the economy is doing badly. And to the bag; therefore, even for those who favor active management, indexing at least part of their portfolio is a highly desirable option.

Funds by asset class

There are fixed income, equity, and mixed-income funds that have historically managed to beat their benchmark and provide returns that can satisfy any investor class depending on their risk tolerance. To give two examples of each class, in fixed income (DWS Invest Euro High Yield Corporates LC and Schroder International Selection Fund EURO Corporate Bond A Accumulation EUR), inequities (BlackRock Global Funds - Continental European Flexible Fund A2 and DWS Invest Global Emerging Markets Equities LC) or a mix of both.

Thematic backgrounds

Investors who have a certain sympathy or interest in certain geographical areas, sectors, or companies that incorporate specific ethical practices in their corporate code have access to thematic funds that adapt to their tastes and offer good returns. For example, if we want to invest in Asia (Morgan Stanley Investment Funds - Asia Opportunity Fund A), large caps (Robeco US Premium Equities D), and in the biotechnology sector (DWS Biotech LC), there is a wide range of options to choose from. If we are also concerned about sustainability, which has become a very recurring theme, there are also funds that invest in assets related to the concept such as the DPAM New Gems Sustainable, BNP Paribas Energy Transition, Schroders ISF Global Climate Change equity.

Various marketers allow the client to access this wide variety of funds. According to our interests, it is convenient to compare the options to contract an investment fund.

Pension plans

This savings vehicle is more relevant than ever. By now, any reader should be familiar with "the problem of public pensions." This is a problem that is occurring in a generalized way in the Western world, and this is going to increase since the current levels of births in contrast to the progressive aging of the population are insufficient to sustain the system.

Investigating the network can find innumerable data and economic reasons why the system is unsustainable; among them, it should be noted that social security is in a deficit situation and that this deficit increases year after year.

Some countries have already started promoting mixed plans. In the USA, talking about private (or even mixed) plans still causes a lot of aversions. Because of this, political parties promise that they will make reforms to guarantee the public pension system. The government has two options: cut spending or raise taxes; both measures are very unpopular.

The accounts do not add up, and sooner or later, they will have to be balanced; Better to prepare sooner rather than later before reality abruptly erupts, catching savers who have always relied on the public pension system off guard. Despite the stubbornness of politicians to hide the problem, there is a possibility that in the coming years, they will finally start talking about mixed plans.

In 2021 it will be the first year the participants will suffer the reduction of incentives for individual pension plans and where we will see the birth and consolidation of company pension plans. Mention the Index employee plan. In addition, a growing trend nowadays is the existence of indexed pension plans; these plans are attributed to investors after carrying out a suitability test. Thus, the plan is assigned based on the risk that the person is willing to bear Index Capital It has also incorporated an employment pension plan aimed at any company. It seems that the government intends to incentivize these plans by reducing the minimum of the maximum contribution of individual plans and increasing the limit of joint contribution (individual and employment plans).

Due to the peculiarities of this instrument, it is advisable to inform yourself properly and learn well how to choose a pension plan. The most important thing is to know how, once we decide to recover our investment, avoid the "tax hatchet."

Investment trends in 2021

In 2020 there was a bullish euphoria in almost every sector. The rebound of the "value" companies at the end of November filled hundreds of pages of financial newspapers in case the moment of this style of investment was about to come in a previous decade marked by high growth values ​​and especially by technology. And it seems that they were not wrong since, at the moment, the funds based on value investing are turning out to be the big winners of 2021.

In the financial world, a health crisis of such dimensions translates into losses, reimbursements, and opportunities. There are long-term sectors that are severely damaged, and that as soon as international mobility recovers, they can quickly emerge. You should also bear in mind that the impact of COVID on economies has been uneven, taking the example of China, which is 2020 was able to continue growing, something unusual in the rest of the world economies.

New stock and environmental regulations in 2021

Tobin Tax and Google Tax

The Tobin tax would imply a 0.2% tax on financial transactions and the Google tax 3% on certain digital services. Some countries in the Eurozone support these tax reforms, while the majority oppose them. As of June 2021, the first payment of the Tobin tax will take place, increasing capital flight to other countries that offer better costs. In addition to discouraging the purchase of large-capitalization Spanish securities, mainly those that make up the IBEX-35.

The growing interest in sustainability

Sustainability has become a prevalent concept over the last year; it has been on everyone's lips. The automotive industry has got down to business and has started to produce new electric car models with potential appeal to the consumer. To combat climate change and environmental pollution, governments and international organizations will issue more regulations (such as IMO 20).

Companies will continue to use sustainability as a marketing resource, and the same happens with investment funds since many thematic funds have recently emerged around this concept. Many managers will systematically incorporate sustainability into their investment strategy and point out the importance it has acquired within the social conscience, which shows a growing trend.

In the next decade, we will be abandoning current cars to drive electric cars. This will obviously increase the consumption of the electricity grid. Since nuclear energy is quite unpopular, it would be interesting to analyze to what extent renewables will sustain the supply of the electricity system in the future.

Lastly, the economy will move towards decarbonization. Apart from reducing environmental pollution, this will also reduce the price of the electricity bill since the supply of electricity through renewable energy, especially wind, is less expensive. Some electricity companies are already changing to this model, trying to be part of the precursors of sustainable investment; However, let us remember that until very recently, most of the electricity supply came from non-renewable energies (at least in Spain), which not only polluted but also made the electricity bill more expensive, increasing the benefits of electricity.

Conclusion

The market is dynamic and is subject to constant changes. What is valid today, conditions may change unpredictably in the future. Planning an investment strategy is essential since it will be our lifeline in the face of an adverse environment. If it is difficult for us to define a strategy, going to an independent financial advisor or a robbery advisor may be alternatives.

To those of you who have come this far, I encourage you to share your experience in selecting investment channels and how your funds have behaved during these times. Have they fallen a lot, a little, or just the opposite?

We recommend that you follow a document prepared by the JP Morgan analysis department that we have taken as a reference for the preparation of this article: Guide to the Market 2021.