2020 was a year unlike any other in the history of the stock market. Despite the dark clouds hanging over the U.S. and global economy, the S&P 500 Index appreciated 16% in the last year, supported by unprecedented measures taken by both the Federal Reserve and fiscal policymakers to revive business activities. The new year definitely brings new opportunities, but 2021 is unlikely to be similar to any other year as well. It would have been relatively easy to predict the winning business sectors during an economic recovery phase under normal circumstances. This time around, however, investors need to be extra cautious as the virus-induced recession has changed the playing field permanently for many industries. A top-down approach to identifying emerging themes that are likely to shape the market performance in 2021 could go a long way in helping investors allocate assets efficiently.
A quick look at 2020
A good starting point is to look at the sectors and companies that dominated the market in 2020 as it will be useful in identifying the market sentiment toward certain industries. The below table provides a summary of the best and worst-performing sectors in 2020 along with the best and worst-performing companies representing these industries.
| Top five best-performing sectors | The top winner in the sector | Top five worst-performing sectors | The top loser in the sector |
| Software applications | Shopify Inc. (SHOP, Financial) | Oil & gas | BP PLC (BP, Financial) |
| Internet retail | Pinduoduo Inc. (PDD, Financial) | Diversified banks | Wells Fargo & Co. (WFC, Financial) |
| Basic materials | Albemarle Corp. (ALB, Financial) | Real estate – retail | Simon Property Group Inc. (SPG, Financial) |
| Freight & logistics | Cryoport Inc. (CYRX, Financial) | Airlines | United Airlines Holdings Inc. (UAL, Financial) |
| Semiconductors | Nvidia Corp. (NVDA, Financial) | Aerospace/defense | The Boeing Co. (BA, Financial) |
Source: Eikon
Looking at the data above, it's easy to determine that investors have rewarded the companies and business sectors that facilitated the new normal while punishing companies representing the hardest-hit industries from the recession. The market performance in 2020, therefore, can be categorized as rational as it would make sense to reward the winners of changing macroeconomic conditions.
With this understanding, the themes to look out for in 2021 will be discussed in the next few segments of this analysis.
Theme one: A potential comeback from value investing
The market remains in overvalued territory, but only a few companies have been responsible for the attractive gains in the recent past. The five largest companies account for more than 20% of the S&P 500 Index value according to S&P Global Market Intelligence, and all these companies are trading at lofty valuation multiples. This could be an indication of potentially undervalued companies even among the largest 500 businesses in the United States. Growth stocks led by big tech names continued to remain hot in 2020, and value stocks underperformed growth across all sizes and styles.
Source: Morningstar
This underperformance has already created opportunities for value investors, especially in small-cap stocks. Even though many market participants remain focused on tech giants, small, undercovered and underappreciated companies might deliver market-beating returns in 2021 considering the bargain prices at which some of these companies are trading at.
There are signs of a market bubble and a rotation to value is likely to happen sooner rather than later. That being said, there is no guarantee that 2021 will be the year in which this change occurs. The trillions of dollars pumped into the economy by the federal government and the ultra-low interest rate environment might push the stock prices of high-growth companies even higher before another reality check sets in. Commenting on the valuation level of the market and the $1.9 trillion stimulus package, Jeremy Grantham (Trades, Portfolio) said in a Bloomberg interview:
"We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust. When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years."
Taking a contrarian approach to investing in stocks and betting on bargains could be a winning theme in 2021 because of the current valuation level of the market.
Theme two: Sustainable investing
Sustainable investing is a concept that has existed for many years now and the strategy seems well-positioned for exponential growth in popularity in the coming years. Whenever institutional investors are getting behind a novel strategy or a market segment, a period of substantial fund inflows follow, resulting in a significant appreciation of stock prices of companies representing these strategies and industries. Today, sustainable investing is at an inflection point as a result of increasingly favorable policy decisions and massive fund inflows. Total assets invested in environmental, social and corporate governance stocks hit a record high in 2020, and this strategy now accounts for approximately 33% of total U.S. assets under management according to U.S. SIF Foundation.
Source: MarketWatch/U.S. SIF Foundation
This year could turn out to be one of the most important ones for sustainable investing as the new Biden administration is likely to support continued investments in this sector, which could open the doors for exchange-traded funds and companies representing ESG investing to deliver stellar returns.
Theme three: A comeback from oil
The oil industry had a disastrous year in 2020, but things are slowly but surely starting to improve. The decline in crude oil prices was primarily driven by an imbalance between demand and supply. Major oil companies have a long way to go to recover fully, but there are some promising signs from the demand front.
Apart from a few European nations, many industrial giants, including China, India and the U.S. have decided to use lockdowns as a last resort to fight health risks, incentivizing businesses to operate as usual. This is a very good sign for the energy industry. The expected economic growth in China is also another driver as the country is one of the largest importers of crude oil. The oil demand coming from China fell initially in 2020, but has since recovered sharply along with the reopening of the country.
Source: S&P Global Market Intelligence
Value investors need to be careful, however, when investing in this troubled sector as a few of the financially troubled oil companies are damaged beyond repair. The key here is to remain with big oil names such as Exxon Mobil Corp. (XOM, Financial) as these companies have both the expertise and the liquidity to navigate rough seas.
Takeaway
Even though investing could be all about finding and investing in multi-bagger opportunities, the process of screening for winning stocks is often complicated. One of the best ways to understand future winners is to be among the first to identify developing macroeconomic and geopolitical trends that could shape the stock market performance in a given period of time. The virus-induced recession and the growth of the work-from-home economy determined stock prices in 2020, and the eventual reopening of the economy and a comeback from value strategies might decide where stocks are headed this year. With this understanding, it would be easy to figure out potential winners that could deliver handsome returns in 2021.
Disclosure: The author owns shares of Exxon Mobil.
Read more here:
- Mario Gabelli Is Bullish on This Renewable Energy Company
- BlackRock's Appeal as a Dividend Growth Stock
- Why Investors Should Keep Faith in Foreign Markets
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
