Equity Trends In 2020 And What To Expect Next Year

This year has seen some dramatic trends from the crunch in value stocks to the outrageous performance of stocks exposed to the green transformation and the digital economy. We discuss all the themes this year and whether they will continue in 2021 or whether we will experience turn of events with new powerful themes emerging.

This year has surpassed even our wildest imagination with a global pandemic racing the world causing severe restrictions crumbling economic activity on a scale not witnessed since World War II. Despite this horrible backdrop we have witnessed some extraordinary events in global equity markets from large winners and losers across companies, industries, and countries. We look at this year’s trends and whether they will continue next year.

This year’s winners and losers

If we look at the two biggest equity markets in the world, the US and Europe, then there is a clear signal across the winners and losers among single stocks. The 20 best performing stocks across these two markets have had an average return year-to-date of 148% in local currency as of last Friday driven by strong gains across stocks such as Etsy, Sinch, Hellofresh, NEL and Adyen all being part of the digital and green transformation trends this year. The pandemic has lifted companies exposed to the digitalisation and governments have increased their investment commitments on the green transformation with a new “green deal” in the EU lifting companies with exposure to green energy.

One company that is not on the list of winners is Tesla but would have been on the list if the company had been part of the S&P 500 Index. Tesla has become one of the most valuable companies in the world this year as demand for electric vehicles has grown dramatically despite the economic fallout fuelling a multiple expansion discounting Tesla dominance in the future car industry and big player in the future of energy markets. Tesla was recently admitted into the S&P 500 index and the inclusion happens today.

The 20 best performing stocks in 2020 among US and European equities

Name	Industry	Return YTD (%)	Total Return 5Y (%)	12M Fwd P/E
Etsy Inc	Online Marketplace	330.6	2,113.0	78.95
Sinch AB	Communications Software	315.4	1,496.0	77.70
HelloFresh SE	Supermarket - Online	232.8	NM	38.75
NEL ASA	Fuel Cells	191.7	572.1	NM
Evolution Gaming Group AB	Mobile & Online Gambling	182.7	1,332.0	39.30
Adyen NV	Financial Transaction Processors	166.7	NM	149.62
Zur Rose Group AG	Pharmacies & Drug Stores	140.7	995.7	NM
Pandora A/S	Jewelry Stores	134.9	-2.5	17.99
NVIDIA Corp	App Specific Multimedia	126.0	1,588.1	46.40
PayPal Holdings Inc	Financial Transaction Processors	118.6	576.0	52.50
L Brands Inc	Women's Clothing Stores	115.9	-48.3	14.32
Advanced Micro Devices Inc	App Specific Multimedia	109.2	3,815.1	53.87
Ambu A/S	Surgical Appliances & Supplies	101.4	465.2	137.59
Zalando SE	Apparel & Footwear - Online	101.3	151.9	95.16
Vestas Wind Systems A/S	Wind Turbines	100.7	202.2	36.30
ServiceNow Inc	Infrastructure Software	100.3	559.5	102.31
Sartorius Stedim Biotech	Life Science Equipment	97.5	409.3	59.71
Dino Polska SA	Supermarkets	95.8	NM	34.93
KGHM PolskaMiedz SA	Copper Mining	94.5	216.9	10.35
Albemarle Corp	Specialty Chemicals	93.6	193.7	33.98

Source: Bloomberg and Saxo Group

The 20 worst performing stocks among US and European equities

Name	Industry	Return YTD (%)	Total Return 5Y (%)	12M Fwd P/E
SocieteGenerale SA	Diversified Banks	-45.1	-49.2	11.6
Royal Caribbean Cruises Ltd	Cruise Lines	-45.2	-16.6	NM
HollyFrontier Corp	Petroleum Refining	-47.9	-27.8	135.2
Diamondback Energy Inc	Crude Oil & Natural Gas E&P	-48.9	-27.5	11.6
United Airlines Holdings Inc	Full Service Airline	-49.2	-21.4	NM
Marathon Oil Corp	Crude Oil & Natural Gas E&P	-49.9	-42.3	NM
ABN AMRO Bank NV	Banks	-50.7	-49.7	17.6
Centrica PLC	Elec & Gas Marketing & Trading	-51.4	-72.1	9.6
Rolls-Royce Holdings PLC	Aircraft Engines &Eng Parts	-51.4	-39.0	NM
Unibail-Rodamco-Westfield	Shopping Center REIT	-51.6	-63.7	7.4
Occidental Petroleum Corp	Crude Oil & Natural Gas E&P	-52.1	-63.4	NM
TechnipFMC PLC	Oilfield Services & Equipment	-54.9	-64.3	14.4
Network International Holdings PLC	Consumer Finance	-56.7	NM	31.2
Norwegian Cruise Line Holdings Ltd	Cruise Lines	-56.9	-55.7	NM
Galapagos NV	Biotech	-57.0	53.4	NM
Carnival Corp	Cruise Lines	-57.3	-53.1	NM
TechnipFMC PLC	Oilfield Services & Equipment	-57.7	NM	14.5
Carnival PLC	Cruise Lines	-61.9	-56.8	NM
International Consolidated Airlines Group SA	Mainline Airline - Full Svc	-62.3	-49.2	NM
Banco de Sabadell SA	Banks	-64.1	-73.9	30.6

Source: Bloomberg and Saxo Group

Among the 20 worst performing stocks the average total return has been -54% this year in local currency driven by European stocks. On the losing list, we find European banks hit hard by the economic fallout, cruise lines and airliners hit hard by travel restrictions and then of course companies related to the oil and gas industry which have been hit hard by lower demand for energy. The energy sector also delivered a true outlier in financial markets history with the first ever negative futures prices with WTI crude going negative as the market ran out of storage capacity. It was a short anomaly and the market quickly normalised again.

We know from the equity factor literature that performance over the past 12 months has a tendency on average to extend, this is also called the momentum effect, so based on past experience we should expect these trends in single stocks to continue, that is digital and green energy companies to continue higher and everything travel related to continue underperforming. But we would argue that this year has been so special that this relationship has a high likelihood of not extending and thus we could see strong mean reversion effects in these performance lists. A better than expected vaccine roll-out is naturally a key necessity for this pattern.

Emerging markets have shown strength

Based on closing prices on Friday, emerging markets had been the best performing market this year ahead of US equities reflecting the better relative handling of Covid-19 in Asia which has enabled the region to faster resume production capacity and exports goods into the developed worlds, but also seeing a faster rebound in consumer confidence and spending. The positive rebound in Asia causing emerging market equities to hit a new all-time high in USD has also spilled into Japanese equities up 13% year-to-date. 

Europe has once again been a weak market driven by poor handling of the Covid-19 pandemic, Brexit tensions that could end in a new no-deal deadline extension on December 31 if the UK and Europe cannot agree on a trade deal. European equities have become one of the cheapest equity markets in the world and in theory a hunting ground for value investors, but the continent’s equities are cheap for a reason. It lacks a big publicly listed technology sector, and the economic engine is impaired relative to other parts of the world. Maybe the green transformation and related stimulus will revert the ugly trends for Europe in 2021.

The value crunch and the disbelief in ‘quants’

Looking across equity factors the overshining story this year has been the absolute crunch of value stocks which are heavily tilted towards financials, miners, energy, utilities and industrials which have all been hit hard by the Covid-19 pandemic. To sum it up in short, cheap stocks have become cheaper and expensive stocks have become more expensive leading to some of the world’s largest quant funds to write many papers explaining the value crunch and that now is a better time than ever to bet on cheap stocks. It might be true, but it likely depends on a few things such as higher interest rates and inflation, and retail investors losing their appetite in equity markets. Recently many investors have talked about the “great value rotation”, but while we recognise the potential, we are not onboard yet. We need to see a breakout of interest rates combined with higher inflation before we join the crowd, and with today’s move due to the new Covid-19 mutation in the UK the value rotation might take a bit longer than expected.

The fall of value stocks this year has many similarities to the 1998-2000 run-up in equity markets and in particularly technology stocks. The retail participation is high again, and estimated to be around 20% of equity flow in the US by some US market makers, but amplified this time by a significantly larger among of call options on top of the cash equity activities forcing market makers in options to push up the underlying stocks through their hedging activities. Retail investors do not invest, or trade based on sophisticated valuation models but invest instead on stories and simple technical momentum indicators. These forces amplify momentum trades and push up already expensive stocks because they are also the ones showing up on momentum indicators. A forceful feedback loop is in play.

Another striking similarity to the dot-com days is the elevated VIX Index together with the strong momentum. In the years 1998-2000, the VIX Index was hovering around 25 on average something the short volatility traders of the past seven years would have a hard time comprehend as the VIX Index has rarely been above in 20 in a sustained manner until 2020 where it has only briefly dipped below 20. As some quant funds suffered in the years 1998-2000, at least those that heavily incorporated the value factor, some of the most well-respected quant funds have also had a hard time this year causing both investors and some well-known quant researchers to doubt the discipline itself. This could be a sign that we are reaching some inflection point, but we do not really know as crazy periods can go on for a long time. But one thing is for sure, we have had a structural shift in the market this year because hedge funds such as Renaissance Technologies are not stupid and if they have been wrongfooted this year on their longer term signals/factors then something profound happened.

Online vs offline

This year will be remembered for the spectacular rebound and returns in stocks related to the online world and the green transformation. As the table below shows, the big winner has been clean energy stocks up 123% year-to-date as investors are betting that the new Biden administration in the US will massively change the landscape for clean energy stocks in the US. China has recently committed itself to become carbon neutral before 2060 and is thus expected to dramatically shift it investments over the coming 10 years. In Europe, which was already leading the game the recent “green deal” will just turbocharge this trend. As we wrote in early January, the green transformation will most likely be one of the biggest trends in financial markets over the coming decade and some of the world’s most valuable companies in the future will be those that help solve the problems related to our environment and climate change.