Letter from
Hamed bin Zayed Al Nahyan
There are few parallels in modern history for the scale of socio-economic upheaval that swept across the globe in 2020. Rarely has a single peacetime event dominated the lives of so many as the initial outbreak and then rapid spread of Covid-19.
It will take time to fully assess which of the many changes to the way people lived and worked in 2020 will represent permanent shifts, and which will return to pre-pandemic norms. What is already clear is that, taken in aggregate, the immediate impact of the Covid-19 contagion has been both broad and unevenly distributed, and its effects will be felt for years to come.
The tragic loss of life to the pandemic offers a stark reminder that countries, economies and businesses are all built on human foundations. Despite this and the numerous other hardships endured during 2020, the year also reminded us of people’s resilience and ability to innovate. The most apt example came with the successful development of several Covid-19 vaccines in less than a year, a timeframe not previously considered possible and a remarkable scientific achievement.
Government mandated lockdowns in the early months of the year caused economic contractions in most countries. China was able to lift its lockdown early and saw its economy rebound quickly under the impetus of renewed credit policy support. Other countries did not fare so well. Multiple waves of infection led to intermittent lockdowns, which delayed and slowed domestic recoveries. As a result, real global GDP growth collapsed from around 2.8% in 2019 to an estimated -4.4% in 2020. This represented the deepest contraction in decades, dwarfing the 2008 global financial crisis.
Equity markets fell sharply as the pandemic unfolded in early 2020, while government bonds benefitted from their safe haven status. In just a few months, most equity markets dropped more than 30% and overall liquidity deteriorated significantly. Such was the impact of the pandemic that markets would have fallen faster and further had it not been for massive and concerted action from global policymakers.
Counter-cyclical fiscal and monetary policies were introduced on an unprecedented scale, while public health measures prevented many households and corporates from spending and investing.
“Throughout the crisis, ADIA
remained focused on its mission of
prudently managing capital on behalf
of the Government of Abu Dhabi.”
This multi-dimensional policy response combined with high levels of accumulated savings to rapidly reverse market sentiment: equity markets recouped their losses quickly and, by the end of 2020, most had posted strong year-on-year returns. During that rebound, bond yields remained low on central banks’ pledges to maintain accommodative policies for the foreseeable future.
The impact of Covid-19 was felt unevenly across sectors. Although lockdowns weighed heavily on transport, retail, hospitality and services in general, they were ultimately more benign for a number of others including housing and industrial goods. Companies at the frontier of digitalisation, including virtual payments, connectivity, online entertainment and deliveries, performed extremely well.
Throughout the crisis, ADIA remained focused on its mission of prudently managing capital on behalf of the Government of Abu Dhabi. To do so, it was necessary for ADIA to react on several fronts. As an employer, it worked to maintain the safety and wellbeing of its employees and their families. As a responsible financial market participant, it enacted robust, detailed plans to ensure the continuity of operations. And as an investor, ADIA moved with clarity and purpose to navigate a situation that had no precedent.
ADIA has always prioritised the building of resilience into both our portfolio and our organisation. This requires careful planning and a clear strategy, balancing the need to manage downside risks in periods of volatility while remaining ready to capitalise on the opportunities that emerge during times of turbulence. This trade-off is at the centre of ADIA’s investment strategy, and we were able to efficiently navigate market turmoil to position ourselves for the rebound sparked by the massive policy intervention from fiscal and monetary authorities across the globe.
As at 31 December, 2020, ADIA’s 20-year and 30-year annualised rates of return, on a point-to-point basis, were 6.0% and 7.2% respectively, compared to 4.8% and 6.6% in 2019. These increases can be attributed to both the years falling out of the calculations as well as performance in 2020, underlining our preference for focusing on long term trends.
ADIA also took the opportunity in 2020 to update certain ranges within its long-term strategy portfolio, reflecting changes that have been underway for some time. ADIA’s investments in Private Equity and Infrastructure have grown over a number of years and this has led to increases in the allocation bands for both asset classes: Private Equity has increased from 2%-8% to 5%-10%, while Infrastructure has increased from 1%-5% to 2%-7%. On a geographical basis, the band for Developed Asia has reduced from 10%-20% to 5%-15%, consistent with changes to the region’s relative weighting in global indices.
The Covid-19 pandemic and policymakers’ responses to it will shape the global economic landscape for years to come. Governments have been forced to run deep fiscal deficits and have accumulated sizeable public-debt burdens. Inflation rates remain subdued but fiscal stimulus, strong monetary growth and demographic trends could prompt a comeback.
Meanwhile, with government bond yields at or very near to their all-time lows, investors will continue to look for ways to expand their investable universe. For the past thirty years, government bonds have offered a powerful combination of market liquidity, portfolio protection and interesting returns, making them an essential tool in portfolio construction. While they will continue to play a role, most investors will also be looking to expand their toolbox and rethink how they approach diversification.
As with any great shock to the status quo, the pandemic has also acted as a catalyst to accelerate a number of important themes in global financial markets.
The speed with which businesses were able to integrate new technologies and operating processes in the early weeks of the crisis augurs well for future productivity gains and, with it, long-term growth prospects. More specifically for investors, it is clear that technology continues to drive rapid and fundamental changes to the business of investing. Innovations that may once have provided years of competitive advantage now often fade in months or even weeks. In parallel, the global economy is facing a period of slower growth after more than a decade of rising asset prices, and now post-pandemic indebtedness. How investors adapt to the increased speed and fleeting nature of potential sources of outperformance will play a large role in defining those that prosper in this new environment.
For ADIA, this has meant a multi-year focus on incorporating more systematic investment processes, leveraging advances in computing power, data analysis and artificial intelligence. One output of this work in 2020 was the creation of a new investment group within the Strategy & Planning Department tasked with applying a systematic, science-based approach to developing and implementing investment strategies. A number of other investment departments also advanced plans to adopt a more data-centric approach to their work. Detailed research is underway to explore non-directional strategies, providing exposure to additional risk factors beyond the equity markets and adding additional layers of resilience to our portfolio.
The past year saw significant developments in the global discussion on climate change. As the world considered how best to address and then recover from the pandemic, it became clear that many people viewed this period as an opportunity to accelerate progress towards a more equitable, cleaner and safer environment. The tone of public sentiment was reflected in financial markets, as the depth and maturity of sustainable investing options continued to grow.
‘‘for investors, it is clear that technology continues to
drive rapid and fundamental changes to the business
of investing. Innovations that may once have provided
years of competitive advantage now often fade in
months or even weeks.”
For a number of years, ADIA has actively considered the potential impact of climate change on our portfolio, including the formal assessment of climate change factors for all new investments. We have also committed capital to a number of opportunities set to benefit from the move to a lower carbon economy. ADIA remains a committed participant in the One Planet Sovereign Wealth Fund Working Group, fostering dialogue and taking action with other global investors to align with the goals of the Paris Agreement.
There is no doubt that 2020 will be remembered as a year of widespread, seismic change. Through careful planning, robust processes and the commitment and skill of its people, ADIA has successfully navigated this year of turmoil while continuing to position our institution for the future.
Since its formation in 1976, ADIA has proven its ability to innovate and adapt during times of significant disruption, and to manage both the opportunities and challenges that result. In today’s context, such qualities are more important than ever. With the increasing speed, frequency, scale and complexity of change in today’s financial markets, it is by drawing on our core strengths that we will continue to deliver successfully on our mission.
