As we entered 2020, the two big sources of uncertainty were related to the two major events that upended everything back in 2016: Brexit and the U.S. presidential election. But we had accounted for these two risks coming into 2020. Then came the global COVID-19 pandemic—this became the dominant story of the year and it continues to be at the center of everything from economics to financial markets to politics.
In this article, FactSet's experts weigh in on the events of 2020 across their respective subject areas.
Economics: COVID-19 Pandemic Leads to Global Economic Downturn
The speed at which COVID-19 spread around the world was staggering and governments were caught off guard as they tried to understand the severity of the virus and figure out how to stop its spread. The widely accepted method for mitigating the spread of the virus was to limit human movement and interactions. This meant essentially shutting down entire economies. The impact of this action was dramatic and devastating.
Strict lockdowns aimed at limiting the spread of this new and deadly virus kept consumers at home and many businesses closed their physical operations. For businesses that deal with consumers face-to-face such as restaurants, hospitality, and entertainment, this meant either laying off or furloughing employees. Meanwhile, b-to-b or b-to-c companies who could sent their employees home and switched to all-virtual operations. Both recreational and business travel came to a halt and many international borders remain closed.
As a result of this nearly simultaneous global demand shock, we saw dramatic economic contractions around the world in the first half of 2020. Over the summer, many countries began to ease restrictions and we saw a rebound in third-quarter GDP growth around the world. Unfortunately, those reopening measures led to a broad resurgence in COVID-19 infections going into the fourth quarter and many countries were forced to reinstate lockdown measures. Most countries are looking at steep declines in 2020 real GDP, even as the approval and distribution of COVID-19 vaccines provides hope for 2021.
China’s Economy: Spending Shifts Toward Health Care and Discretionary
As post-pandemic Chinese consumer spending has turned positive starting with the August 2020 figure, the long-term shift in spending patterns towards health care and consumer discretionary continues. Looking at the eight different types of expenditure tracked by China’s National Bureau of Statistics, we can see the five-year growth rates of expenditures on Health Care and Discretionary (official category is Culture, Education, and Recreation Services) have increased 82% and 64%, respectively, while overall expenditures have increased 49%. The slowest growth rates came from the two consumer-staple-oriented categories: Clothing (22%) and Food (35%).
Breakdown of Chinese Consumer Spending
2019 Share of Total
Culture, Education, and Recreation
Transport and Communication
Miscellaneous Goods and Services
Household Facilities, Articles, and Services
Food and Tobacco
Source: China National Bureau of Statistics, FactSet calculations
U.S. Earnings: S&P 500 Earnings Projected to Register Largest Annual Decline Since 2008
The estimated (year-over-year) earnings decline for the S&P 500 for CY 2020 is -13.7%, which is below the 10-year average (annual) earnings growth rate of 10.0%. If -13.7% is the actual decline for the year, it will mark the largest annual earnings decline for the index since CY 2008 (-25.5%). The unusually large decrease can be attributed to the negative impact of COVID-19 on several industries within the index during the year. At the sector level, four sectors are projected to report year-over-year growth in earnings, led by the Health Care sector. Seven sectors are expected to report a year-over-year decline in earnings, led by the Energy, Industrials, Consumer Discretionary, and Financials sectors.
As we approach the end of 2020, European companies have been hit hard by the global COVID-19 pandemic. Only the Healthcare sector is looking to report positive EPS growth for 2020. On aggregate, the STOXX Europe 600 is looking to report a 35% decline in EPS for 2020. This is slightly better than the expectation back in September when analysts estimated a drop of 40% for the year. This slight improvement comes mainly from the Industrials and Real Estate sectors where the earnings expectations have increased substantially. However, for Energy and Consumer Discretionary, there is still no end in sight. Looking ahead into Q1 2021, the STOXX Europe 600 is currently expected to grow 31%, the same expectation as back in September.
Fixed Income and Markets: 2020 Was Not So Surprising
The biggest surprise for me this year, after reviewing my 2020 predictions, was how accurate I was across the four predictions made (albeit against a clearly unanticipated global disruption):
The Euro curve completely in the negative? As of mid-December, the 30-year point is at -.16%. Read that again. You are theoretically paying for the pleasure of no default risk for 30 years. To quote Buzz Lightyear, that is QE “to infinity and beyond!”
The Fed actively easing rates? While I saw another 25 bps in the cards, clearly the move back to a zero interest-rate policy combined with other backstop measures was necessary to support the global economy as the world came to a pause in March.
Corporate bond issuance exceeding the 2017 record? Nailed it. As of December 3, the Securities Industry and Financial Markets Association (SIFMA) reported that YTD issuance was nearly $2.2 trillion, representing a 59% increase over 2019 and a 32% increase over 2017’s record year. Issuers took advantage of “lower for longer” and the Fed backstop in a major way.
Risk-off in oil? Got that one too, although clearly the immediate demand shock that started in Q1 accelerated a noticeable trend.
ETFs: 2020 Saw a Proliferation of Actively Managed ETFs
Actively managed ETF launches accelerated in 2020. The counts below include ETFs that changed strategies (from passive to active = launch, from active to passive = closure) but exclude ETFs that hold active type exemptive relief despite tracking indexes or rules-based strategies.
Despite the flurry of press activity around non-transparent active ETFs (ANTs), only 15 have launched so far. The bulk of the launches are fully transparent. That's why I called out the proliferation of actively managed ETFs overall, without tagging the ANTs.
In a competitive environment, it's hard to stand out. The median AUM of active funds launched in 2020 is just $22.3 million. Over one-quarter of the AUM in active funds launched in 2020 came from in-house sources.
While median AUM rises as ETFs season, that effect seems to peak in years two to four in the $50-60 million range. On the bright side, natural inflows do seem to diminish the role of in-house funding for ETFs that survive, such that median non-affiliated asset levels of $50 million become achievable. Will that continue to be the case with over 100 new participants joining the fray?
2020 has been the year of ESG and nowhere more so than in Europe following the release of the Climate Benchmark Regulation and the Sustainable Finance Disclosure Regulation (SFDR) at the end of 2019.
Since then, the EU has doubled down with the enactment of the Taxonomy Regulation and publication of a mountain of ESG consultations and initiatives including proposals for fundamental reform of the Non-Financial Reporting Directive and entirely novel regulatory regimes for ESG ratings providers and green bond verifiers.
Other regimes to have jumped on the ESG bandwagon include China and the UK with the Prime Minister of the latter publishing a 10-point plan in the Financial Times for a “Green Revolution.”
Elsewhere, in Europe, investment firms were treated to a new prudential regime, an updated derivatives regime (EMIR 2.1 and 2,.2) and a steady flow of MiFID II reviews, compared with the U.S. that saw politically-driven deregulation dominate, including several Volcker Rule rollbacks. Meanwhile the UK, U.S., and EU all examined the need for market data reform with the EU proposing a real-time consolidated tape for equities.
Globally, the LIBOR transition and regulatory responses to the pandemic were constant themes as was Brexit, as the UK sought to tote its newfound independence with several divergent developments, all the while paradoxically claiming “equivalence” in Brexit negotiations. One such divergent development—a UK Magnitsky law—looks set to be followed by an EU equivalent soon, perhaps heralding a new European regulatory competition dynamic emerging across the English Channel.
Cloud solutions took a huge leap forward in 2020 and that is where the market continues to head and for good reason. Taking and managing large datasets locally is not only cumbersome from a cost and human capital perspective but the ingestion and maintenance of that data an extremely time-consuming process. I expect movement to the cloud to only expand and move further into integrated services such as mapping of client proprietary identifiers and off-the-shelf technologies.
Private Markets: Deal Flow Was Negatively Impacted by 2020 Events
Global PEVC deal flow was negatively impacted by the pandemic and U.S. political turmoil in 2020. General partners (GPs) scrambled to digest the impact on portfolio companies and prospective opportunities, which was exasperated given the inability to conduct on-site due diligence. Although 2020 PEVC deal counts decreased, data suggests that private company entry and exit valuations are near (or in some cases at) all-time highs. On the limited partners (LPs) side, research indicates that LPs risk appetite naturally decreased in 2020 suggesting LPs are more comfortable investing in larger GPs/funds that have more resources and capital to weather the storm.
U.S. IPO Market: SPACs Drive 2020 IPOs to a New Record
U.S. equities have been buoyed by the Fed’s accommodative monetary policy in the face of the COVID-19 pandemic, the successful development of multiple vaccines, and a late-year federal stimulus package. As a result, the major indices reached new highs in mid-December. This positivity has been reflected in a surge in initial public offerings on U.S. exchanges in the second half of the year. We saw a record number of IPOs in the third quarter, 209, and activity remained strong through the fourth quarter with 153 IPOs recorded as of mid-December. With just days left in 2020, there have already been 480 IPOs this year—a new record high.
The second-half surge in IPO activity has been driven by a boom in offerings from Special Purpose Acquisition Companies (SPACs), sometimes called blank check companies. SPACs are companies that are created with the express purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. In the third quarter, there were a whopping 116 SPACs that went public, representing 56% of all IPOs for the quarter; to date, the fourth quarter has seen 75 SPAC IPOs, making up 49% of the total number. For the year to date, SPACs account for 49% of all IPOs.
As private companies increasingly look for innovative ways to bring their shares to public markets, it will be interesting to watch this trend going forward and track the performance of these SPACs.