How COVID-19 Vaccines and Brexit Create the Trade of the 2020s

Key Points

  • Around the globe, value is trading at extremely deep discounts relative to growth. The discounts are wide no matter how we measure valuation.

  • While we still like our last named trade of the decade, emerging markets value stocks, the UK equity market, and UK value stocks in particular, are now even cheaper.

  • With the final Brexit deal done and the rapid COVID vaccination rate in the United Kingdom, the outlook for UK value is extremely promising, enough for a “trade of the decade.”

Rob Arnott is the corresponding author.

In mid-January 2016, when emerging markets (EM) value stocks were extraordinarily cheap, Research Affiliates identified this segment of the market as “the trade of the decade.”1 In the first two years after the low of January 21, 2016, EM value earned 80%. RAFI EM, with a value tilt, fared even better with a gain of 85%.2 In the depths of the COVID-19 crash in March 2020, EM value again settled back to bargain-basement prices, offering investors another bite of the apple.

In late 2020, a new kid emerged on the bargain-of-the-decade block. As Brexit negotiations broke down again and again, and a more virulent form of COVID emerged in the United Kingdom, UK stocks, and notably UK value, reached implausibly cheap levels relative to justifiably "fair" values of stocks in other developed economies. We began describing UK value as a new trade of the decade. Even today, UK value remains at remarkably low valuations relative to most of its fundamentals, while enjoying a few fundamental tailwinds.

When the Going Gets Tough…

Most investors are transfixed by current events, but surprisingly few will ask: “Will these events matter much in five years?” Neither Brexit nor the COVID-19 pandemic is likely to have near as much impact in 2026 as in 2020–2021. Therefore, the market shocks induced by these events represent opportunities now.

The COVID-19 pandemic continues to have an enormous impact on the global economy. Although still too early to tally the numbers, many indicators place the current recession—and in many countries, a double-dip recession—among the worst shocks the world economy has experienced over the last century. According to the International Labour Organization (ILO) (2021), the pandemic caused an 8.8% decline in global working hours in calendar-year 2020, the equivalent of 255 million jobs lost. The ILO measures the impact as about five times as large as the 2009 labor losses arising from the global financial crisis. The 2020 losses disproportionately afflicted the working poor, most of whom do not have the luxury of working from home.