Australian Equities in 2021, Look Beyond China's Tantrums

market analysis

Australian equities in 2021, Look beyond China's tantrums

By

Paul Ashworth, Managing Partner


Posted 14 December 20

Looking past China's tantrums, Australian equities should on balance perform well in 2021.

Interview with ausbiz, 14 December 2020

During an interview with ausbiz today, Paul Ashworth our Managing Partner, shares his balance of risk assessment that Australian Equities should perform well in 2021 (but that we will also contend with a further appreciating Australian Dollar).

For 2021, Australian Equities stand to benefit from the combination of:

  1. Good policy (fiscal + monetary)
  2. Luck (containing COVID other than Victoria's 2nd outbreak), and
  3. Good fortune (strong iron ore demand whilst Vale Brazil flounders).

Here are the key summary points from the interview:

  • China tantrums and year-end profit taking should not distract investors from a solid return outlook for Australian equities (and the Australian Dollar) through 2021.
  • The COVID fiscal and monetary policy responses from Australia, combined with the effective elimination of COVID virus in Australia, has uniquely positioned us in the world for a strong rebound in economic growth and earnings growth. Cameron Harrison sees this as being broadly positive for Australian Equities, but particularly cyclical enterprises with rotation broadly away from expensive growth and technology.
  • We also assess there to be strong upside risk in the Australian Dollar (with USD$0.80c quite plausible) – other than bulk export income, the rising Australian Dollar impact is more muted as inbound tourism and education are on hold - this will concern the RBA in its drive to stimulate domestic growth and employment, potentially driving it further into unconventional policy action.
    - It is always a balance of risk, and the upside risks for household spending and housing activity we assess to outweigh the downside risks of currency appreciation, reduced immigration, weak wages growth and China trade actions.

The 'Good' Factors

1. Household to contribute strongly to consumption demand:

  • Household saving accumulated through COVID and assisted by fiscal and monetary policy measures supports consumption through 2021.
  • House price ‘armageddon’ never eventuated and a near-zero cash rate with signalling this, will continue well into 2022-2023, which sees house prices robustly responding (and supporting household wealth).
  • Victoria’s growth rebound will deliver strongly in the 1st half of 2021.

2. Export growth supports national income:
Our bulk commodities will continue to support national income through 2021 (but we retain a pessimistic view beyond 2021).

3. World growth:
A broadly accepted and implemented vaccine program in developed and developing countries will see a rebound in world economic growth, which in turn is supportive for Australian growth and quality businesses that are leveraged to economic growth.

The 'Not So Good' Factors

1. Currency:

  • A key implication is the continued strength in the Australian Dollar approaching US Dollar 80c with longer-term interest rates rising.
  • The resurgent Australian Dollar is a headwind to domestic growth and (significant) annoyance for the RBA and its domestic growth and employment stimulation objective.

2. Immigration:
A major driver of growth in Australia over the last 10 years, net migration inbound is likely to drag on economic growth and more particularly, further pressure State Government revenue in terms of property taxes.

3. Earnings growth disappoints:
Performance will revert to individual frim and sector earnings growth – whilst the macro environment should broadly deliver the growth backdrop, businesses will again have to show they can execute and deliver growth outcomes, or face the ‘sword’. This is likely to present a market risk in the second half of 2021.

Peace of Mind Investing

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.