The Year of Covid-19: Top Ten

Covid-19 defined the year in a way that few events ever do, overshadowing almost everything else in 2020 for millions of people around the world. The year was bookended by the stealthy beginning of a global pandemic, and now, by the vaccines that give hope of ending it. Global markets experienced their own rollercoaster, plummeting as the reality of this novel virus set in in the spring, and rebounding with an exuberance that seemed disjointed from most people’s lived experiences.

As with our other “Top Ten” features of the year, what happened in markets was linked, albeit indirectly, to Covid-19. So that’s where we start.
1. The new coronavirus: SARS-CoV-2, Covid-19, or just Covid

Unbeknownst to most, the new coronavirus was already spreading around the world as 2020 began. Since then, more than 76 million people have become infected and almost 1.7 million have died, as of December 21. Lives have been upended and businesses destroyed, in rich as well as poor nations. Highly trained scientists advocated medieval, yet effective, ways of combating infection: quarantine, isolation, face coverings. As some people ignored this advice, a predicted second wave of Covid-19 came with a vengeance to Europe and the US. In the last few days, a new, even more infectious variant of the disease has been discovered in the UK, adding to fear and misery there. Not for a century has the world suffered a pandemic of this virulence and impact.

But we also end the year with a dramatic demonstration of what is really different from earlier eras. Safe and effective vaccines, based on the most advanced science about the human body, produced at scale in modern manufacturing plants, and financed largely by governments, are already being rolled out more quickly than anticipated. There is real hope for 2021, as we look back on nine other ways investors may remember 2020.

2. The Big Disconnect — real GDP down, financial markets up

As the global economy plunged into lockdown recession in the spring, millions of people lost their jobs, businesses were shuttered, cities became ghost towns and lines at food banks grew long. Initially, financial markets froze and stocks plummeted. But, starting in April, markets soared, even as economists projected that the overall world economy would actually shrink in 2020 — an outcome more devastating than during the Global Financial Crisis a decade ago.

The disconnect has continued. After the summer, economic recovery faltered. In the US, only half of the 22 million jobs lost earlier in the year have been regained but payroll gains have petered out. As we approach year-end, US unemployment is likely edging up again with new unemployment insurance claims rising again this month. Poverty in America has worsened, a study released last week showed. Europe is expecting a double-dip recession, with output contracting again in the fourth quarter as the surging virus has led to more government restrictions. Meanwhile, equities have pushed through record levels, delivering outstanding returns to Americans lucky enough to be invested in stocks.

Why? See 2 and 3 for some answers.

3. Central Banks to the fore — once again

Central banks that had already begun to ease policy in 2019 did not waste time when the crisis hit. Liquidity gushed to calm markets wherever stress appeared. Interest rates were pushed down, and new quantitative easing measures were announced and implemented. Promises from the Fed, ECB and other major central banks that rates will stay low much further into the future brought down yields and supercharged equities.

The unprecedented Fed action in response to the pandemic included a promise to buy up to $750 billion of US corporate bonds through its primary and secondary market corporate credit facilities (SMCCF). As of the end of November, the total amount of outstanding loans extended under the SMCCF was less than $14 billion. Instead, companies were able to tap private markets, in enormous amounts, on the back of just the promise of the Fed’s market participation. This year will turn out to be one of the biggest on record for corporate debt issuance. Those lining up to buy distressed assets have kept their powder dry. With no distressed cycle in sight as of yet, rising equity markets globally and easy credit, corporates are benefitting and investors continue to ride the wave.

4. Governments ramped up spending — deficits and debt be damned

With astonishing speed, governments acted alongside central banks in the early phase of the crisis, shoring up incomes, including in the US with direct checks sent to households; supporting credit to troubled businesses; and, in Europe, preserving jobs through wage subsidies. Fiscal relief in 2020 far outpaced that in the wake of the Global Financial Crisis, particularly in the US, and was delivered much earlier in the crisis. After months of delay, the US Congress has now agreed a further package of fiscal support of some $900 billion — delivering welcome relief to millions and a substantial boost to the economy going into 2021. Economists and central bankers have supported government action. To ensure a broad-based recovery, countries need to rely more on budget support and less on easy money to bolster the real economy.

5. The haves and the have-nots

Covid-19 both revealed and exacerbated deep inequities. In the US, research has shown that unemployment has climbed sharply among lower-income groups while rising much less among the well off. Data has shown that there is a stark divide along racial and socioeconomic lines of those suffering from infections, hospitalizations and deaths. African Americans are dying at 1.8 times the rate of Caucasians.

The uneven toll from disease contributed to a sea change in attitudes this year towards systemic racism, most notably in the US. The tragic and shocking death of George Floyd, an African American man whose killing at the hands of police officers was captured in a wrenching video, sparked global protests on racial inequality. And the video moved the US debate from city streets to the halls of major corporations, many of whom took up the slogan of Black Lives Matter, and to global investors.

Gender disparities have also widened in the Coronavirus Recession. The uneven hit to service industries has pushed up female unemployment, in contrast to the usual recession pattern. Meanwhile, widespread school closures have made life harder, for both women who have the option to work from home and those in essential or frontline positions. It seems that many have decided this year that it is all too much, and have dropped out of the labor force.

More broadly, investors will have to decide whether and how to react to the rising inequality gap and the longer-term implications from this global crisis. Research shows that diverse firms are more successful. But opportunity has not usually come their way, with funding going overwhelmingly to white, male firms and founders. RockCreek’s $6.5 billion of investments with diverse company founders and fund managers since our inception is an indication of what investors can do to mobilize capital, generate strong returns and bring attention to diverse opportunities. With investments of over $700 million in black-owned firms and $2.2 billion in women-owned firms, our portfolios benefit from a diversity of thought, background and investment style. RockCreek investments in impact-related themes across education, healthcare, climate, affordable housing and other sectors continue to be strong return drivers in our portfolios with the potential to positively affect the communities most in need.

6. Technology wins the day — but still irks regulators

Right from the beginning of lockdown, the internet smoothed the way for those lucky enough to be connected. From video conferencing to food delivery to online shopping to streaming films and staying in touch with family and friends, technology has transformed pandemic life. Investors have cheered.

As RockCreek has noted for much of the year, the top five stocks in the S&P 500 (Apple, Microsoft, Amazon, Facebook, and Alphabet) accounted for the lion’s share of the S&P’s approximately 17 percent return in 2020. These five stocks alone returned nearly 50 percent compared with a little less than 10 percent for the rest of the index. The US equity markets were not the only beneficiaries of technology. Technology-enabled companies in emerging markets led performance throughout the year in a variety of sectors, including consumer, healthcare, and IT.

The technology boom extended beyond the established companies to newer entrants and private companies. Peloton and Zoom are just two examples of home run investments for early tech adopters. The buoyant tech market also supported a wave of IPO activity in 2020 as discussed in last week’s letter. Companies ranging from software solutions provider Snowflake to household names such as DoorDash and Airbnb have been racking up big gains after going public in 2020. While some investors are talking about a tech bubble others consider a new age of tech a phenomenon here to stay, given the significant changes in behavior around work, school, and home in 2020.

Politicians and regulators are less enthusiastic. Big Tech, in particular, has drawn the ire of regulators on both sides of the Atlantic. In the US, lawsuits against Google allege the company not only manipulates its search results, but also that it colludes with Facebook in the digital advertising space and fixes prices in that market. Facebook has issues of its own with the US Federal Trade Commission calling for a splitting of the company, saying that it is the only way to undo the anti-competitive environment in social media which has taken hold as a result of Facebook’s long-running “buy or bury” approach to rivals. The EU is calling for more self-policing under the threat of facing more fines and/or calls for break-up. Apple, which has been dealing with allegations of anti-competitive behavior in its app store for much of the year, now faces the prospect of additional investigations into its Apple Pay business. The European Commission launched a formal probe into Apple Pay in June, and more countries have been upping their scrutiny of the service in recent weeks. Despite the regulatory noise, investors for the most part have been staying with these stocks as the growth prospects continue to be appealing for the market.

7. Asia shows the West

Poverty affects the incidence of Covid-19 within countries. But poorer countries in Asia have been successful in containing the virus just as their better-off neighbors — from China and Korea to Australia and New Zealand. In Vietnam, whose population of 95 million is almost one-third that of the US, there have been just 35 Covid deaths. In Indonesia, the toll is worse, at close to 20,000 so far in a population of 270 million, but still orders of magnitude below the US and Europe.

China’s ability to curb the pandemic — with a lockdown that seemed drastic in January, but less so as other nations imposed restrictions — meant that life got back to almost normal by the summer. Remarkably, China is the only major economy expected to avoid a drop in GDP this year.

Emerging markets more generally were characterized by a tale of two geographies in 2020 linked to Covid-19. Taiwan and Korea also brought the disease under control fairly successfully, and North Asian markets, led by China, Taiwan and Korea, far outperformed the rest of the emerging and frontier market countries. The MSCI EM Asia Index outperformed the MSCI EM ex-China by 15 percent. There is some good news for the rest of EM, however. The vaccine news coupled with a global commitment to low interest rates has buoyed markets like Russia, Brazil and others in Latam in recent weeks. We are in the early innings of broad-based recovery in emerging markets, which we think will continue well into 2021 as investor flows take advantage of attractive valuations.

8. ESG holds ground

The pandemic threatened to elbow out climate concerns. Governments focused on the global health threat postponed the 2020 United Nations Climate Change Conference to next year, while public transport fell out of favor for fearful travelers. But sustainable and impact investing has gone from strength to strength, in a positive sign for the future. Climate investing is seen by many — including fossil fuel companies — as the future and not only a necessity for our planet, but also a generator of jobs.

RockCreek has been a player in sustainable investing for much of the last 17 years and we are excited to see the growing attention by institutional investors. During their tenure at the World Bank, several RockCreek team members were early investors in renewable energy, including the development of the first “green bonds” and the first bonds with returns linked to carbon credits (“COOL bonds”). Since inception, RockCreek has invested over $5.2 billion in ESG and impact-related companies and funds across sectors and themes. With strong returns and impactful KPIs, we only expect it to grow. With 2020 investments in fast-growing, innovative and responsible companies such as Apeel Sciences, Bioage and Devoted Health, we see a growing pipeline of opportunities.

In 2020, we launched a dedicated RockCreek Impact Fund to take advantage of these investments and more, started managing a 100% mission-aligned portfolio for the Equality Fund Initiative, became a founding signatory to the IFC Operating Principles for Impact Management, received an A+ from UN PRI in our annual Principles for Responsible Investment Assessment Report and were named on Exelon’s 2020 Diversity & Inclusion Honor Roll to name a few highlights. 2021 will see the launch of our climate fund, and other initiatives to advance the field of sustainable investing.

9. Science Rules — biotech comes into its own

Attempts to buck the scientists went awry in 2020. Those who disdained wearing masks or ignored pleas to socially distance spread infections. In Sweden, an experiment in building herd immunity by letting the virus “run its course” was questioned by public health experts. King Gustav and other leaders in Sweden last week lamented the failure of the approach, as the death toll is rising and hospitals near capacity. And the great achievement of 2020 — development of vaccines and new drug therapeutics — built on scientific advances in the field of genomics. This holds great promise for revolutionizing treatments of disease. It also reaffirms RockCreek’s belief in investing in biotech and other less revolutionary ways to advance healthcare. Just see how telemedicine has taken off. Unlike online schooling, online medical treatment has proven highly effective.

10. Oh — and the US Presidential election finally ended

The US Presidential election delivered a winner, President-elect Joseph R. Biden. President Donald Trump has yet to acknowledge defeat or concede. But on December 14, after the process of state-by-state voting in the Electoral College occurred, and numerous legal challenges to the results had been thrown out by the courts, Senate Majority Leader Mitch McConnell congratulated President-elect Biden and Vice President-elect Kamala Harris. Look for a more traditional attitude towards politics and governing in 2021. President-elect Biden has called for a bipartisan approach. He is assembling an experienced White House staff and diverse Cabinet, as promised. Success in carrying out his agenda will depend in large part on control of the Senate. We will only know that in 2021, after two Georgia runoff elections on January 5.
RockCreek Update
Last week, RockCreek Senior Advisor Caroline Atkinson appeared as a panelist at a virtual event entitled Rebuilding the Global Economy: Role of International Finance and Central Banks hosted by the Peterson Institute for International Economics (PIIE) to discuss policy priorities and solutions heading into 2021. Watch here.

RockCreek Senior Advisor Laura Tyson joined Bloomberg’s Wall Street Week with David Westin last week to discuss the possibility of economic recovery. Watch here.

This holiday season, RockCreek has made donations to support three non-profit organizations: St. Jude Children’s Research Hospital, Miriam’s Kitchen, and RISE-DC. St. Jude Children’s Research Hospital works to advance cures, and means of prevention, for pediatric catastrophic diseases through research and treatment. No child is denied treatment at St. Jude’s based on race, religion or a family’s ability to pay. Miriam’s Kitchen fights towards ending chronic homelessness by providing critical services — such as healthy meals, housing, healthcare, and advocacy — to those in need. RISE-DC helps low-income youth in Washington, DC, achieve academic and career success by providing educational resources such as high-quality tutoring and college and career mentoring free of charge.

As the year draws to a close, we are grateful to our clients and partners for their continued trust and partnership. We thank our team for outstanding work and commitment.

We wish you a safe and joyous holiday season.

Team RockCreek

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