Key themes and risks for 2021
KEY THEMES FOR 2021
The highest probability prediction is that the themes that are trending at the moment will continue to trend. There is no point us heading off down some lonely contrarian road just because it's 2021.
Believe what is happening now, invest in that and the odds are that you will be more right than wrong. So here are the current themes that are likely to persist and deserve more faith than some wild clickbait fantasy:
- Expect the bull market to continue until it doesn’t. Don’t constantly worry about a market collapse. Just be alert to it. React don’t predict. We intend to remain fairly fully invested until we wake up and decide not to be.
- Look for the recovery sectors to recover again assuming the vaccine roll-out gains momentum. The recent Australian hot-spotting has dented REITs, travel and tourism and energy remains well off its highs – an opportunity.
- Stock pick technology stocks. Many are still in La-La land when it comes to valuation. The days of surviving on popularity, momentum and FOMO are limited – be prepared to trade them not invest in them.
- The Resources sector trend depends on unreliable commodity prices. OK for now but don’t take them for granted.
- The Energy sector is still well below its long term highs – it remains a recovery sector. Stick with it unless there is a vaccine hiccup or an oil price top.
- Banks are for income, not growth but the odds for the year ahead include a few positives – dividend normalisation, earnings improvement (as they add back over-provisioning), less regulatory interference, higher interest rates (wider margins) and earnings upgrades.
- Aussie dollar strength – The A$ has rallied hard as economic recovery hopes pump commodity prices and commodity currencies. The odds are on it continuing which will limit the performance of the big international stocks...healthcare mostly.
THE BIGGEST RISKS
The market “Climbs the wall of worry”. There is always something to worry about but we really don’t need to worry about things that
could happen until they happen.
But what could put a spanner in the works? Your guess is as good as mine but the most obvious market killer is a virus mutation that renders existing vaccines ineffective and puts us back to square one on a medical solution. Pandemic beneficiaries would soar, recovery sectors dump, gold will fly, and the market will briefly collapse. Mild forms of that will come with anything that dents the market’s global economic assumption or delays it.
Another obvious development would be the appearance of inflation and a change in central bank rhetoric from maximum stimulus to hawkish policy tapering. The central banks are unlikely to allow a repeat of the “taper tantrum” that caused the market to fall over in October 2018, so we can probably relax for this year at least.
