Bearish on bonds where yields can only go up and rallying value stocks, EF 8AM Global Focussed co-manager Andy Merricks said he doesn’t believe that the growth stocks will underperform next year and won’t be changing the focus of his strategy in 2021. 
Industry veteran Merricks (pictured) said that this time last year he had predicted that there would be no recession in 2020.
“So, what will 2021 bring?” he asked. “And more importantly, what may it pay to avoid this time around?”
According to the latest survey by global markets and macroeconomic research house Absolute Strategy Research, asset allocators around the world are the most optimistic they’ve been for the past six years, which “should sound alarm bells” for investors, Merricks said.
He explained: “You need two sides to make a market and when you get excessive groupthink a change in sentiment can cause liquidity issues.”
As such there are several areas that Merricks will be avoiding in his EF 8AM Focussed fund is the bond market.
“With yields as low as they are it is very hard to envisage them going in any direction other than up,” he said. “And we all know that a rising bond yield equals a falling bond price.”
Although they are considered a safe-haven asset by many, said Merricks, “bonds appear to be as risky a safe haven as one can imagine”.
He said: “Central banks and pension funds may still buy them because they have to, but to voluntarily buy them as an asset allocation call seems to me to be a strange choice to make.”
After aggressive monetary policy in response to the Covid-19 pandemic, interest rates are currently at record lows, with genuine concerns of rates turning negative earlier next year.
However, if the economy starts to grow strongly and central banks decide to begin raising rates, Merricks said bonds might become attractive to income-seeking investors once again.
“Should yields rise they will become more attractive for income-seekers, but default rates on the back of the Covid disruption that we’ve seen this year will be something to keep a wary eye on,” he said.
Yet, being bearish on bonds is a consensus position, he said.
Where he differs from other fund managers is in his stance on which part of the equity market will perform best during 2021.
Referring back to the Absolute Strategy Research survey, Merricks said just 9 per cent of those polled expect growth to outperform value next year, which he described as “extreme”.
“Value investors have been waiting since the 2008 global financial crisis to see their style regain the ascendency on any consistent basis and despite their optimism I would be surprised to see it happen in 2021,” Merricks said.
“Much is expected from out of favour sectors as we enter a ‘new normal’, but growth sectors were doing significantly better going into the pandemic and I can’t really see why they won’t continue to do better after it as well.
“Admittedly, in the short term, there may be some rotation towards undervalued sectors, but over a 12-month period I can’t really see why it should continue.”
Performance of styles YTD
While many think of the US mega-cap FAANG stocks – Facebook, Amazon, Apple, Netflix and Google-parent Alphabet – when they think of growth, Merricks said it’s wrong to have to narrow a focus.
Although these companies make up a large proportion of the S&P 500 and are responsible for some of the blue-chip index’s strong returns this year and over the past decade, there are other interesting growth stocks worth considering, particularly over old industry value stocks.
“As we emerge blinking into whatever the new normal has in store for us,” he said, “can we honestly expect sectors such as cyber-security, robotics and automation, cloud computing, educational technology, healthcare innovation, electric vehicles, and e-commerce and consumerism in Asia and the emerging markets to provide fewer opportunities for significant growth than a return to sectors such as oil & gas, banks, mining, travel, manufacturing and telecommunications?”
He continued: “I won’t be rushing to switch focus within 8AM Focussed away from the sectors that seem to describe the new normal, just as they were beginning to do in the old.
“Time will tell, of course, which makes the investment world such an interesting one to work in. It’s also a world that, as a few ‘names’ have found this year, punish you severely if you get it wrong too often.”
Performance of fund vs sector since 1 January 2017
Source: FE Analytics
Since Merricks joined the EF 8AM Global Focussed fund on 1 January 2017, it has made a total return of 31.09 per cent compared with a gain of 27.12 per cent for the average IA Flexible Investment peer. It has an ongoing charges figure (OCF) of 1.92 per cent.