18 Jan What’s on the horizon for 2021?
Happy New Year Shareplicity friends.
As the first anniversary of the first reported COVID case passed without fanfare, I want you all to consider what’s install for the next twelve months. Here’s where we are at here in Australia and in the US, as we head into what we all hope will be a better year than 2020.
At home
In Australia, our market has been tracking sideways with a rotation into the banks, oil and iron-ore stocks, and out of the technology, defensive and healthcare shares.
Cyclical, reflation shares such as the banks and resource companies have been the standout winners on the back of the rising long end of the yield curve in the US (i.e., the 10-year bond). Banks will benefit from higher net interest margins (when the interest rate curve is positive – longer-dated bonds are higher than shorter date government bonds). The oil price is rallying with some analysts forecasting US$65 per barrel in 2021. Iron ore is back at record prices, and so are the share prices of RIO Tinto, BHP, Fortescue and Mineral Resources. You can expect some juicy dividend payments from these mining giants. Bank shares may also surprise with some better-than-expected dividends as the economy recovers, and provisions for bad debts are reduced.
In contrast, the high Australian dollar (due to the expected reflation trade or pick up in global economies) has punished major healthcare companies, and anything tech-related has also come in for some hefty profit-taking.
Shareplicity took some profits at the start of the year, as there were some juicy gains from 2020. I am now sitting on around 20% cash in both my Australian and US stock portfolios and will look for opportunities. The upcoming reporting season in both Australia and the US will no doubt create some opportunities.
In the US
From a US stock market perspective, the markets continue to garner not only the money flows, but the Teflon coated attitude of “what could go wrong?”.
Not even historic civil unrest could temper investor enthusiasm for what has evolved into a much deeper rally in US stocks; meaning the rally broadened from the big tech growth names to energy, banks, and some reflation, re-opening trades. This is a positive sign of healthy stock markets.
However, speculative behaviour continues. The punters at Robinhood continue to chase and gobble up SPACS (special purchase acquisition companies) in secular themes such as electric vehicles (EVs), healthcare and fintech.
Bitcoin and other cryptocurrencies took a tumble after reaching a new record high of US$40,000. Now, all eyes will be on whether the bitcoin rally can be maintained or they’re in for a more sustained period of volatility and consolidation.
Tesla took off like a proverbial Space X rocket after the Georgia run-offs with the Democrats securing another two seats in the Senate. The US Senate is now tied 50 seats to the GOP and the Democrats, giving Vice President, Kamala Harris the deciding vote.
The two-seat win in Georgia also sparked a conviction that the Democrats will be more successful in their big and potentially multi-trillion-dollar spending programme, starting with Biden’s new fiscal US$1.9 trillion stimulus package including a top-up of COVID-relief payments to US$2000 to eligible recipients.
The US bond, currency and stock markets also reacted to the Georgia results, with the 10-year Treasury yield climbing swiftly from just over 0.95% to as high as 1.1803% intraday on January 12. The US 10-year Treasury has since pulled back to around 1.087, as the COVID pandemic death toll reaches 400,000, claiming 4,000 lives per day.
Looking ahead
The US markets will now be fully focused on the US earnings season and the outlook provided by management. Some economic indicators point to a softening in the recovery with an increase in the number of people staying at home and awaiting their COVID stimulus cheques.
Manufacturing, however, seems to be recovering strongly, but this may be a case of restocking. Interestingly, major car manufacturers have had to slow production due to a shortage of semiconductor chips.
Stock markets will continue to look for signs of rising inflation, which will be a bellweather for not only how stock markets move but which stocks rise and fall. Chartists feel 1.18% on the US 10-year bond is an inflection point. A push past 1.18% signals a rise to 2%. Such a move could spark a heavy sell-off in stock markets in both the US and Australia.
US stock markets could move either way in the next few weeks over the reporting season. Poor results or subdued expectations may result in a sell-off (even the great results from JP Morgan on Friday failed to lift the banking giant’s share price). Or better than expected results and a strong outlook may cause a rise in the 10- year bond again and boost inflationary expectations.
We are almost at a damned if we do, damned if we don’t stage in the US markets, meaning good or bad news good could be taken as a reason to selloff, as share prices have run hard across all sectors, including the small caps and the recent ‘crazy’ IPO listings, where 100% first-day gains are de rigueur.
In Australia, technology favourites such as Xero, Technology One, and even REA and Carsales as well as healthcare stocks (CSL, Resmed, Cochlear, Sonic) and defensives like Coles, Woolworths, Amcor and Ansell will struggle under the reflation trade (higher interest rates and bond yields), while banks and resource stocks will be well supported.
The ongoing strength in the Australian housing sector will support the banks (record mortgage lending was reported in November 2020) and those shares exposed to building and construction such as Boral. I particularly like the newly listed non-bank lender, Liberty Financial Group, for exposure to housing.
I think there is scope for a nasty sell-off at some stage, but as always, the “when” it happens is the hard part; hence the profit-taking.
Glass half full
On balance, I remain pretty positive about the course of 2021, but I believe there will be an ongoing tussle between value (cheaper, cyclical shares) and growth (tech, healthcare) shares, as the extent of the recovery – particularly in the US – plays out.
I’m yet to be convinced that the US and even Australia will experience a prolonged rise in inflation, as there are so many deflationary forces at work, including aging demographics and technological disruption. Thus, my portfolios are positioned with a mix of quality cyclical and quality growth, healthcare and tech stocks.
I want to wish you all the best for 2021. Stay safe and remember when investing in the share market, know your stocks; there is nothing wrong with taking a profit, and markets could likely remain volatile over the next few months.
DISCLAIMER – Shareplicity offers information that is only general in nature. It does not take into account your personal financial situation, needs or objectives. Nor does it take into account the financial needs of any specific person. You should consider your own personal financial situation and needs or seek financial advice before making any decisions based on this information