Four investment themes for Australia in 2021
The ASX 200 equity index fell 1.5% YoY in 2020, lagging a 14.1% rise in the MSCI World index. Despite world-leading management of COVID-19, this underperformance largely reflects four factors: i) the ASX 200’s stretched starting point entering 2020; ii) the RBAs less aggressive stimulus than its peers, particularly the Fed; iii) COVID-19 accelerating the shift to new technologies underrepresented in Australia versus the US and Asia; and iv) a sharp 10% YoY rebound in the Australian dollar hitting returns of overseas earners.
Looking into 2021, we emphasise four investment themes:
Theme #1: A powerful V-shaped recovery driving a profits boom: a limited hit from COVID, unprecedented stimulus, strong positioning and surging confidence should drive a V-recovery, powering a 50% YoY rise in profits, similar to the post-GFC’s 47% YoY rebound (Figure 1).
Theme #2: The RBA to be dovish and reactive, making it slow to remove stimulus: the RBA recently accelerated its easing. Combined with very low inflation, its public statements, fiscal cliff fears and lessons from the taper tantrum, we expect no early withdrawal of stimulus, supporting asset prices.
Theme #3: The search for yield to intensify: cash at zero and bonds around 1% will drive substantial excess funds into growth assets. As Australian businesses restore dividends, the local yield will rebound.
Theme #4: ongoing Australian dollar strength: surging commodity prices and global growth indicators, reasonable valuation and current account surpluses should drive the AUD into the mid-to-high-80s.
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