INVESTMENTS

Equities

The first quarter of 2020 saw global equity markets experience their steepest decline on record. Economies around the world were plunged into a sharp contraction, business activity declined rapidly and unemployment spiked.

As countries sought to contain the economic impact of the Covid-19 pandemic, the policy response was emphatic: governments and central banks announced fiscal and monetary stimulus on a scale not seen in more than 50 years. These steps were successful in ensuring the ‘CovidCrash’ was short-lived and global stock markets soon rallied to recover all or at least a significant proportion of their losses.

Defensive stocks led the stock market rebound until October, as market participants priced in a long, slow recovery. However, in November investor confidence was buoyed by positive news on the development of effective vaccines against Covid-19, and this resulted in a rotation into pro-cyclical stocks. Both developed and emerging equities delivered strong absolute returns, but performance was mainly concentrated in a few countries. The US was the only major country that managed to outperform the MSCI Global Developed Markets Index and only three emerging markets – Taiwan, China and Korea – outperformed the MSCI Global Emerging Markets Index.

Information technology stocks were among the leading gainers, recording an eighth consecutive year of strong outperformance. In both developed and emerging markets, the energy sector was the biggest laggard while the real estate and financial sectors also underperformed. As prospects for recovery in various domestic economies improved as the year progressed, smaller cap stocks posted stronger performance after trailing the returns of larger cap stocks for several years.

Given the unprecedented level of monetary and fiscal support coming from central banks and governments, along with positive news on the broader distribution of vaccines, many market participants expect the bull market to continue in 2021. However, numerous risks could change this outlook and lead to a slower-than-expected recovery. Most prevalent of these include the possibility of additional waves of Covid-19 infections and slower-than-expected distribution of vaccines. From a geopolitical standpoint, the potential for ongoing trade friction between the US and China remains.

ADIA invests in public equities through two departments: the Indexed Funds Department (IFD) and the Equities Department (EQD). IFD manages the largest proportion of ADIA’s equities with the objective of achieving index returns with the flexibility to add value within approved guidelines.

IFD introduced a climate change portfolio in the first quarter of 2020, based on a framework that systematically integrates the opportunities and risks associated with the transition to a lower carbon economy. The portfolio performed in line with its objectives under low tracking error guidelines. The Department will continue to study potential enhancements to the framework in 2021.

IFD also increased the size and broadened the scope of its ‘Index Plus’ strategies, which continued to meet performance expectations in 2020. During the year these strategies benefitted from the prevalence of liquidity-driven opportunities such as capital raisings, as markets reacted to the spread of Covid-19.

ADIA’s Equities Department was created in 2020 by combining two previously separate departments – one overseeing the activities of external managers, the other managing multiple internal portfolios – to provide a total portfolio perspective for ADIA’s active equity exposures. This new structure aims to enhance EQD’s ability to target markets it deems most attractive from a risk-return perspective, with a view to concentrating its active management capabilities on areas with structural advantages and strong prospects for future growth.

On that basis, in 2020 the Department further evolved its approach to investing in a number of markets. One specific example is with Japanese equities, where it removed its single-country, internally managed mandate while continuing to invest in Japan through its external managers. This, combined with the passively-managed portfolio in IFD, meant ADIA’s overall exposure to Japan remained consistent, while enabling EQD to reallocate resources to other markets that it believes can offer more sustained outperformance in the future.

In 2021, EQD plans to introduce a new externally managed Andean mandate and has identified an existing manager to lead its efforts in capturing local opportunities. The Department will also continue to review its country exposures to ensure it focuses on markets where active management is most likely to offer returns at the higher end of the excess return spectrum.