A VIEW FROM THE TOP END

Markets:

Over the past two weeks the ASX was flat and the S&P500 gave up 1.6% as lockdown restrictions in Europe and North America played out despite rising vaccine optimism and a potential US stimulus deal. Over the holiday period, typically trading volumes fall significantly, and we can see some funny trading patterns emerge, but for the year, the ASX will have returned 3.4% and the S&P500 will be up 7.9%. With all the talk about recovery shapes, looking at the chart of both markets, the folks that figured it would be a “checkmark” are the winners.

A Rosy Outlook for 2021

We are fully aware of the year that 2020 has brought us, as it has been a tale of survival for most and a testament to the resilience of the human spirit. Collectively we have adapted to the situation that we were thrust into. We are not in the clear yet, but the light at the end of journey is in sight with the arrival of vaccines. It is the end of the calendar year, so now is a good time to look at the data and forecast what is in store for us over the next 12months and the next 10yrs as we tip toe into a new decade.

For the next 12months, we are generally positive, both for the global economy and here in Australia. We have used a barbell approach to the recovery, focusing on commodities and growth names in our framework sectors. We were ahead of the curve switching to this strategy and the market consensus has now caught up to us. The Wall Street Journal conducts a survey of economists every year and by the highest margin in the survey’s history the experts are predicting upside over downside for GDP, with the probability of a recession at the lowest point in 19months. With Central Banks reluctant to put the brakes on the economy, equities are set to run hot.

Real time data shows that the recent 2nd wave has had a lesser effect on consumer behaviour. Low mortgage rates are pushing house prices, resales, and construction activity. Typically, these housing forces support household wealth, sentiment and boost the economy. Finally, pent up consumer demand is a coiled spring, ready to be released when life returns to “normal”. All these factors are a positive for the economy and markets.

Bonds on the other hand will be in tough with low rates. Yield hungry investors will have to look to bond proxies such as real estate or infrastructure.

Bonds on the other hand will be in tough with low rates. Yield hungry investors will have to look to bond proxies such as real estate or infrastructure.

A Thematic for 2021 and Beyond

Where will we go over the decade as we approach 2030? It is a big question and we have had a crack.

Creative destruction as the pandemic subsides will be evident as productivity increases over the decade. Productivity lagged through much of the ‘10’s and is set to increase in similar fashion to the period post the 1930’s depression and WWII. Technology adapters will start to reap benefits, as the sellers of technology begin to lose ground to the users of technology. Right now, the beneficiaries of automated cashiers are the companies selling the technology itself, but over the next decade, companies that put the machines in place will see their profit margins expand. Tax Reform in key economies like the US will also bring increased capital investment to those regions and push productivity further.

The deglobalisation and mercantilism pendulum will swing from a globalised world (peak mercantilism) to a world where strategic industrial capacity will be maintained at home instead of abroad. During the ‘10’s we saw the pendulum begin to swing back from the peak in ‘00’s. Lower wages, energy, and transportation prices, no longer offset the costs of intellectual property theft, exchange rate, and supply chain risks. A locally sourced manufacturing model makes more sense for the upcoming ‘20’s, with only the tech sector holding off. An added factor of China’s instinct to exert more control over their domestic companies with increased regulation may see them loose pace on innovation. Other export heavy economies such as Japan, Germany and other parts of Europe that rely on selling goods to the world will see reduced relevance as deglobalization takes hold.

Finally, demographics are destiny, as Baby Boomers give way to Millennials as the key drivers of consumption globally. Purchases of Automobiles to fixed income will be affected by the shift where Millennials enter their peak lifestyle consumption years. Millennial causes for the environment, sustainability, and governance (ESG) will drive investment. Technology advances around these pursuits will drive markets. We will see advances in electric vehicles, autonomous vehicles, mobile networks (5G), battery storage, power generation, genetics, food production, transportation, etc etc. All these leaps forward should be viewed through the lens of those born from 1981 – 1996.

There are two types of people in the world, those fighting to keep up, and those that are fighting to keep things the same. We are definitely looking forward to what the 2020’s will bring.

Updating our checklist:

• Valuation: ASX & S&P500 levels: Valuations in the US rose and in Australia they dipped. As at print date the S&P (26.62x) and ASX (22.04x) fwd PEs remain at record highs supported by government stimulus and near zero interest rates. News of further stimulus in the US pushed the market higher during the week, with anticipation that the new year and a new administration would bring more spending at the calendar rolls to 2021.


• Global PMIs: Economic data has been positive. Interestingly data out of Europe, despite recent lockdowns has not been as bad as expected. Retail sales figures have dipped, for instance the UK showed a 2.6% fall, but more importantly it shows the push towards online as consumers are still consuming, how we do it is adapting. Alternatively, high street sales in London did not fare as well as online and are down 30%.


• Downgrades on guidance: Confession season has begun in Australia as companies release news to the market ahead of their half year reports in January. We have seen a few downgrades as such between 10 – 20% so far. Expectations are beginning to be reframed for the next quarter. Company’s that have been hit by a down grade have seen their share prices react almost 1:1, which is typical.


• Infection rates to slow globally: We would call the vaccine news over the last two weeks mixed. In the medium-term humankind has multiple weapons to attack the virus and ultimately win the war. In the short term, swathes of North America and Europe find themselves in “circuit breaker” lockdowns for the holidays to flatten the infection curves and keep ICU figures sustainable. In the UK a new fast spreading strain of the virus has seen strict isolation measures brought down. Experts have noted that despite the appearance of this super spreader version of Covid19, current vaccines are still expected to be effective against it.


• Monetary and Fiscal stimulus announcements globally: After months of predicting it, the US government finally has a bill before the president for signature this week. The figure is below the original $1.3 trillion estimate; however, an infrastructure bill is expected in the new year which will more than make up the difference. We do note the 11th hour push by President Trump to get increased stimulus will likely only delay a bill instead of killing it outright. He is no longer in charge in a month. With stimulus likely we will turn our attention to the central banks and look for them to continue support by growing the money supply, which will get domestic banks lending on cars and homes again. The continued expansion of the money supply is a core component of the positive thesis around asset prices in 2021 (both equities and real estate).

The new year approaches and we are about to close the chapter that was 2020. With a few trading days left in the year the ASX and S&P are tipped to carve out positive returns. Looking at what the markets have done over the last 12months, the most evident conclusion we can see from the data is the benefit of staying invested through events like the one thrown at us during 2020. A lot of us probably wish we had our money buried in the backyard when things were crashing in March, but the sun does rise again, and the world does not stop rotating. If we did not believe it before this year, we should believe it now, stay invested!

Positioning for 2021, we see a sea of opportunities created by this crisis. In 2021 we will have the virus on the run, the story will be about re-opening the world, re-uniting families, and celebrating getting our lives back. It will happen slow at first, but by this time next year it will be a tidal wave.

If you do find yourself in a position with a little extra money after the holidays, there is no better time to see one of our advisors to help you reach your financial goals. We are optimistic for 2021, and we wish you all the best, take care and speak again in the new year.

Regards,