Few people will shed a tear to see the back of 2020, but as the year draws to a close, it seems that investors are looking forward to 2021 with cautious optimism.

AJ Bell has surveyed around two thousand DIY investors to assess their thoughts on the prospects for markets in the coming year. The results show investors are pretty positive about how 2021 is shaping up.

Two thirds of respondents said they were ‘cautiously confident’ about their investment portfolios for 2021, and a further 12% categorised themselves as ‘very confident’. Many are planning to keep investing in the market, with 45% saying they would invest the same amount as this year, and 42% planning to invest more.

One of the main reasons given for this was low interest rates, with six in 10 of those planning to invest more citing poor cash returns as a driving force.

This isn’t too surprising given that collectively we have saved around £150 billion into cash products this year, as a result of the enforced frugality of lockdown. Much of that money will be earning less than the rate of inflation, so we can expect some of it to gradually find its way into markets in search of a better return.

It wasn’t just the measly rates on cash that are turning investors towards the market, half of those planning to invest more also said that they would do so because they think markets look attractively valued. Happily more than a quarter said they found investing fun, which is a positive they can take forward into next year.

TAX FEARS INCREASE

Concern that tax reliefs maybe withdrawn was also on investors’ minds- a fifth flagged this issue as a reason to put more money to work in the market.

That’s no doubt because higher rate tax relief on pension contributions potentially faces the axe, as the chancellor tries to balance the books. It’s been on the guillotine many times before, and lived to tell the tale, though higher earners will probably play it safe by topping up their pensions ahead of the March budget, just in case.

Once you’ve decided to invest of course, the question is – where? In a reversal of recent trends, UK equities are top of the shopping list for DIY investors.

The FTSE 100 has been a notable laggard on the international stage in 2020, and investors are consequently gearing up to tilt their portfolios towards the UK. That could mean we see a return of flows into UK equity funds, after a number of years in the wilderness.

Indeed investors are pretty bullish about prospects for the FTSE 100 next year, with three quarters of them pencilling in a rise of at least 7% from current levels.

A significant minority are expecting better still, with a quarter anticipating the FTSE will rise over 15%, to 7,500, or beyond. The benchmark index doesn’t include dividends, which would typically add another 3% to 4% on top of these figures.

ASIA TIPPED TO STAR

Investors are fairly split on which international region will be the best performer in 2021, but Asia gets the most votes at 37% of those surveyed.

That’s perhaps because China was first into the pandemic, and managed to contain the virus relatively well. Indeed the OECD forecasts China will actually post a modicum of economic growth over the course of 2020, though at a predicted 1.8%, that would still be significantly below the 6%-plus expected under normal circumstances.

In terms of sectors, just over half of investors expect technology stocks to continue on their winning run next year, with only one in five expecting a reversal of fortunes. A significant proportion of investors (28%) were undecided, perhaps they were lapsed sceptics.

TECH CONFOUNDING THE DOUBTERS

It’s becoming harder and harder to cast doubt on the seemingly limitless rise of the tech stocks, though the fact the Tesla share price has risen eightfold in the course of twelve months sets alarm bells ringing.

Amazon’s valuation of 90 times earnings now looks positively pedestrian compared to Tesla’s PE ratio of over 600 times earnings. But it takes a brave soul to bet against Tesla after watching the plentiful traders betting against it get badly burnt by its continued strong performance.

Finally, turning to the pandemic, around two thirds of investors think that vaccines will prevent the need for lockdowns from March 2021 onwards. It’s clear then that vaccine hopes underpin a lot of investors’ confidence, and the outlook would be nowhere near as positive if we were still waiting for the outcome of trial results.

However, that still leaves around a third of investors who aren’t convinced vaccines will ride to the rescue by Easter. Maybe after a testing year, they are hoping for the best, but expecting the worst, and that seems like a reasonable compromise.

DISCLAIMER: AJ Bell is the owner and publisher of Shares magazine. The editor (Tom Sieber) owns shares in AJ Bell.

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