4 reasons for optimism after a year to forget

2020 wasn’t the year anyone expected. Every year has a big surprise of some sort – or what Dr Don Stammer has long called factor X. But they don’t usually have such a profound impact on people’s lives, nor affect investment markets the way the pandemic has.

To summarise, coronavirus has:

• caused a massive health crisis;
• kept people in their homes;
• shut down big chunks of economies;
• driven the biggest economic slump since the Great Depression with global GDP expected to have fallen by 4% in 2020;
• accelerated the shift to a digital economy;
• sent share markets plunging;
• sent growth stocks sky high relative to value stocks.

But while 2020 is a year many of us would prefer to forget and coronavirus continues to wreak havoc, the end result for investors hasn’t been so bad, and there is reason for optimism as we head into 2021.

Just as 2020 was dominated by the pandemic and this determined the relative performance of investment markets and stocks within them, 2021 is likely to be dominated by cyclical recovery.

There are four reasons for optimism.

1. Massive fiscal and monetary stimulus protected incomes and jobs enabling a faster than might be expected.
2. The news of vaccines is positive. By end 2021 or early 2022 there is a very good chance the world will be approaching a degree of herd immunity.
3. A Biden presidency should usher in a period of more stable and expert based policy making in what is still the world’s biggest economy. In particular, it will likely head off a return to trade wars.
4. Australia has navigated 2020 far better in controlling coronavirus than most comparable countries and has seen its politicians and institutions work well together. The Aussie economy is now recovering nicely.

The combination of vaccines, massive policy stimulus and pent-up demand is expected to see a supercharged cyclical rebound in global GDP of around 5.5% in 2021. This will likely drive a big rotation away from investments that benefitted from the pandemic – like tech and healthcare – to investments that will benefit from recovery – like resources, building materials, industrials, tourism stocks and financials.

It will also mean a rotation away from the growth (tech and healthcare) heavy US share market to more cyclical markets in Europe, emerging markets and Australian shares.

In particular, it’s likely that the relative underperformance of Australian shares that’s been evident for the last decade now has run its course. This will likely start to reverse as the Australian economy outperforms, benefiting from its high exposure to cyclicals like resources and financials. See the next chart.

Finally, it’s likely to see a further recovery in value of the Australian dollar as it benefits from rising commodity prices.

It may make sense for investors to rebalance into cyclical investments that have underperformed over the last year.

One thing investors can't ignore in 2021

The above wire is part of Livewire's exclusive series titled "The one thing investors can't ignore in 2021." The series will culminate in the release of a dedicated eBook that will be sent to readers on Monday 21 December. You can stay up to date with all of my latest insights by hitting the follow button below.