Sifting through the rubble: James Gerrish picks eleven stocks to rebuild in 2021

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Low-interest rates, government stimulus and a post-COVID structural shift in equities will define markets in 2021 according to James Gerrish of Market Matters. 

As we step into the New Year, investors need to sift through the rubble to find the companies that have structurally benefitted from COVID-19, as opposed to those who have only been met with short term earnings growth. 

"It's really thinking about what the influences of COVID have been, whether they're transient influences or more structural influences in nature."

With volatility still prevalent, a vaccine rollout on the cards and a large-scale rotation from growth into value stocks in full swing, Gerrish is chasing the sectors and companies that will be unaffected by market uncertainty. 

In this video, Gerrish details his outlook for markets in the new year, highlighting his preferred sectors, and provides insight into his portfolio giving the names of eleven stocks he likes in 2021. 

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Edited Transcript 

Q: What are the key factors driving markets in 2021? 

The macro backdrop is always key, but I think probably more so going into 2021. So by that, I mean interest rates. Interest rates are at incredibly, historically low levels. Central banks globally have confirmed that they want to keep interest rates at low levels. 

The RBA here in Australia has said that they're going to peg the three-year bond yield to 10 basis points. So you think about the backdrop for equities in that scenario, they love low-interest rates. So that's a really positive thing for the equity market. On the fiscal side, so how governments are going to support the recovery coming out of COVID, I think is going to be key. 

So, the big focus is what's happening in the US on the fiscal side. We're expecting a pretty large package to come out of the US and I think that's going to be supportive of the market going forward. And then in terms of the vaccine rollout. We've had really strong data out of the trials from the vaccine, we've got the UK starting to roll theirs out. It makes me nervous. If I liken it to developing a mine, we've gone out there and there's been a lot of exploration done, and we've had really good exploration success, but a lot of complexity can come when you've got to develop the mine and roll the mine out and meet those production targets and all of that. So, I think that's really going to be key in 2021 as well - how well we roll out the vaccine on a global context. 

If you think more micro, so in terms of stocks, it's really thinking about what the influences of COVID have been, whether they're transient influences or more structural influences in nature.  

Travel stocks are probably the most obvious ones, have the influences of COVID been structural or transient? 

So I think structurally, corporates are going to travel less, so that's going to have a really big impact on the travel spend from corporates. So that has a big bearing on the travel stocks is a group here in Australia and globally. If you think about that in the context of supermarkets, we all shop more online. So that's been the tipping point for supermarkets, to be able to get scale in there on the online offering, which I think is a real positive and a structural tailwind for that area of the market. So, those sorts of things we're thinking about from a micro side. 

Q: What should investors be careful about moving into 2021? 

There's always a lot of things in the market that we should be careful of, but it's easy to get over-confident after, we've had the best month in November in 32 years. We've had a lot of new people come into the market, opening new investor accounts. We've seen a big uptick in the number of subscriptions we've been selling in market matters. So to me, I think it's probably that complacency you can get if you go into the market, the market rallies. 

The market's up 40%, stocks are up 50, a hundred per cent in some cases. So, that concern that I have that people think it's all too easy, it's hard in the market to consistently deliver results. So delivering consistently is a really important key for investors out there. So, that probably will be the areas that I think you should be careful of going into '21 and of course, being in the right sectors the right time. The backdrop that I've just talked about, the macro backdrop is starting to feed into higher inflationary expectations. From a portfolio positioning point of view, you need to be conscious of that. There's areas in the market that really benefit as longer-term interest rates rise, inflationary expectations rise, and the like.

Q: What companies do you like for 2021? 

When I look at a company, I want a company to not be influenced by the external factors happening in the market, in terms of the market noise. So I want management to be running their companies the best they can, given the conditions they're operating in. 2020 has seen a lot of uncertainty around that, and those companies that have really dug in and run their businesses as best they possibly can, have come through COVID in pretty good shape I think.

So, we've got positions in the portfolio, in Costa Group (ASX:CGC), which has managed that period during COVID extremely well and the business has now got some really strong tailwinds. For a lot of years, it had some really strong headwinds. I made mention of the resources' companies. So, we've got positions in South 32 (ASX:S32), that we've added to in the last month or so. I think that's a business that can do very well next year. The large-cap resource companies, BHP (ASX:BHP) for instance, we've got that in the portfolio. 

And then the mining services companies. I think these are more volatile areas in the market. So, if you look back -  have they handled COVID?  Have they been defensive, et cetera? Probably not. But if I think about the companies that I want to be in going forward, and that's what as investors we've got to do, we've got to make decisions today on our outlook for tomorrow.

So, mining services are an area that we like, Monadelphous (ASX:MND) we've got in the portfolio, NRW Holdings (ASX:NWH). And I think in the infrastructure space, that's going to be a growth area going into next year as well. So, we've got LendLease (ASX:LLC) in the portfolio, we're looking at Downer EDI (ASX:DOW) to add to the portfolio. So, if I think internationally,  I'm going back more towards the value-orientated areas of the market. So, UBS (SWX:UBSG) is a stock that we've got in our international portfolio. Wells Fargo (NYSE:WFC) in the banking space is a really undervalued global bank in our view. But also tying that in with some interesting tech orientated businesses that have benefited from COVID in a structural sense, rather than just a short term earnings sense. 

I like the look of Shopify (NYSE:SHOP), Trade Desk (NASDAQ:TTD) is one of our largest positions in the international portfolio. So, we've got blended portfolios that have, Aussie equities, international equities, and some other income type securities. 

But yeah, I'm reasonably excited going into 2021.

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Market Matters writes a straight-talking, concise, twice daily note about their experiences, the stocks they like, the stocks they don’t, the themes that you should be across and the risks as they see them. Click here for your free trial.

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