Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 389

Australia 2021 market outlook: cautiously optimistic

In terms of the global backdrop, the election victory by Joe Biden in the US and news of several potentially highly-effective vaccines against COVID-19 have significantly reduced uncertainty over the global outlook for 2021 and beyond, which is positive for all markets, including Australia. Short term, for the next three to six months, some headwinds remain, notably the impact on the US and European economies of second coronavirus waves this winter, plus delayed and possibly smaller fiscal stimulus.

Vaccine progress impressive

With regard to positive news on vaccines, the undertaking of manufacturing and distributing vaccines on a global scale is huge and without precedent. The logistics and financing are not straightforward, and it may well take longer than we currently expect. Nevertheless, a degree of optimism is warranted.

On current production plans, it should be possible to inoculate a significant proportion of the world’s population next year. ‘Herd immunity’ may take a bit longer to achieve, and an early return in 2021 to pre-COVID conditions could yet prove wishful thinking.

Stock markets are forward-looking mechanisms, however, and good news on the vaccination front has given investors hope. Under a best-case scenario, the global economy could embark on a broader, more sustainable recovery from the middle of next year. The Organisation for Economic Co-operation and Development (OECD) believes that early vaccine availability could add as much as 2% to world GDP growth in 2021, raising it to 7%.

Shift to Asia

For now, economic forecasts for 2021 for both the domestic economy and the world remain highly uncertain, with low visibility also for corporate earnings. One thing we can be reasonably sure of, however, is that overall 2021 is likely to be a better year than 2020, with more light at the end of the tunnel as the year progresses. The negative short-term economic costs and disruption from the coronavirus do not detract from the longer-term positive case for Australian equities. The global center of economic activity continues to shift away from the US and Europe toward the Asia Pacific region, the Asian middle classes continue their ascent, and Asia leads in many of the new technologies whose adoption the coronavirus has accelerated. 

The Regional Comprehensive Economic Partnership (RCEP) trade agreement, for example, points to increasing regional economic liberalisation and integration. These positive secular trends are not being called into question. The Association of Southeast Asian Nations and five other Asian countries, including Australia, signed a deal that will eventually form a free trade area that includes over 30% of the world’s GDP today, rising to around 50% by 2030, even without the participation of India. It brings China, Japan and South Korea - the three largest regional economies - under a regional trade deal for the first time.

It is a development with potentially greater longer-term than immediate significance for a highly competitive market economy like Australia. The RCEP economies already have intra-regional trade shares of 50% or more (based on exports), and increased regional integration should see this rise over time. The agreement eliminates tariffs and quotas for 65% of regional trade in goods, with an ultimate target of 90% in 20 years’ time. It can be expanded in the future to include other areas such as services, becoming a driver for closer Asian economic integration.

Economy well placed to rebound

Australia’s economic recovery is likely to be uneven, and the country is expected to continue to suffer from the drag of strict international border closure for some time yet. With key state and federal elections due in 2023, fiscal policy is not expected to tighten much as the pandemic programmes start to unwind. Also, with the Scott Morrison Government doing well in the polls, an early federal election in 2021 cannot be ruled out, despite the Prime Minister affirming recently that he is a ‘full termer’. 

Public construction spending on buildings and works in 2020 has followed a strong countercyclical trend, providing an offset to weak private sector spending. The servicing cost of large fiscal deficits is low, thanks to the aggressive monetary easing by the Reserve Bank of Australia (RBA). 

The RBA promised not to lift rates until ‘wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market’. RBA easing has provided strong support to the Australian housing market, with little forced selling due to COVID-19 thanks to record-low mortgage rates, loan deferrals, JobSeeker income support payments and stamp duty reform in New South Wales that is encouraging more first-time buyers into the market.

We regard the Australian economy as being in as good shape as any of the developed economies. Most companies are seeing activity and profits rebound and Australians, with few foreign travel options, are spending more at home. Australians typically spend more on tourism and foreign travel than other OECD countries as much greater distances dictate longer holiday trips.

The China factor: plus or minus?

China’s economy has also largely returned to normal, the only major economy to have done so, and this is good news for Australia, despite increased trade tensions and the cooling in political relations between the two governments. We expect to see strong demand by China for Australia’s commodity exports in 2021. While Beijing has imposed trade restrictions and informal bans on a number of Australian exports, demand for Australian iron ore is significantly higher year on year. With the US expected to adopt more measured policies toward China, there is an opportunity for Australia to recalibrate ties also, avoiding further Chinese tariffs.

We see some scope for China-Australia relations to improve rather than cool further.

Investment opportunities: warming to quality cyclical growth

We favour some of the high-quality growth stocks that can benefit from a low-growth, low-inflation and low interest rate world. Companies like medical device manufacturer Resmed, for example, are showing that their business conditions are starting to improve and normalise. We believe the company is well placed to return to strong growth in its sleep apnea business over the next six to 12 months.

There are a number of other quality growth stocks, which we believe are in a similar favourable position to Resmed, such as James Hardie, Seek Group and Aristocrat. In contrast, after the recent strength we have taken some profits on iron ore producers and the materials sector, as we think the best news on China’s economic recovery in momentum terms is behind us.

Given the challenges of rolling out the coronavirus vaccine globally, we are cautious toward the market’s rotation into lower-quality cyclicals or heavily impacted sectors like travel and question the sustainability of the recent move. For the market, the real story for earnings is more likely to concern 2022 rather than 2021, when investors will be looking for strong, sustainable earnings per share (EPS) growth.

In view of the ongoing risks, we have maintained exposure to some defensive growth names as well as quality cyclical growth. On the positive side, consensus expectations are not too demanding, with EPS growth of just 6% in FY21 following a 20% decline in FY20 (MSCI Australia in US dollars).

Concluding thoughts

We are cautiously optimistic toward Australian equities in 2021, the only developed equity market that is favoured as an overweight by our global multi-asset colleagues. The Australian share market has supportive valuations (the price to book value ratio is close to its five-year average at 2.0), a decent dividend (trailing dividend yield of 3.2%), while FY20 earnings estimates have bottomed and are being revised higher (three-month change = 2.7%). The market is also less at risk from a small number of highly valued large growth stocks, and returns this year have been more evenly distributed across sectors, including consumer discretionary and communication services.

 

Randal Jenneke is Head of Australian Equities at T. Rowe Price. This article is general information and does not consider the circumstances of any investor.

 

RELATED ARTICLES

How did you go? Australian and global stockmarket winners and losers

What to watch in post-pandemic 2021

Just how reliant on China are we?

banner

Most viewed in recent weeks

24 hot stocks and funds for 2021

Many investors use the new year to review their portfolios, and in this free ebook, two dozen fund managers and product providers give their best ideas for 2021 - some stocks, some funds, some sectors.

Great new ways the Government helps retirees

Last year's retiree checklist of services available was one of our most popular articles. There are some additions for 2021, and while it can take effort to set them up, they can pay off over the long term.

The hazards of asset allocation in a late-stage major bubble

The Grantham article everyone is quoting, in full. "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble ... this could very well be the most important event of your investing lives."

Four simple strategies deliver long-term investing comfort

A long-time advocate of the merits of generating income by investing in industrial companies rather than bonds or deposits checks his 'mothership' chart for the latest results, and continues to feel vindicated.

Cut it out ... millionaires are not wealthy

The widespread use of 'millionaire' must stop. Inflation means that the basket of goods and services that cost $1 million in 1960 now requires $15 million. Today, millionaires are not wealthy.

Retirement changes everything: a post-retirement investing framework

Categorising post-retirement needs – living, lifestyle, legacy and contingency – creates a framework for retirees. Advisers can translate these needs into investment goals and portfolios.

Latest Updates

Investment strategies

Unfortunately, all fund manager presentations are good

Part of the fund manager's job is to raise money from investors, and with years of practice, a few good stock stories and an educated guess on the future, it's not hard to present well. That's a problem for investors.

Latest from Morningstar

Win some, lose some: Buffett's 2020 scorecard

Warren Buffett's investment portfolio gains attention because of his legendary status, but parts of his empire in insurance, railways, metalworking and aircraft suppliers have been damaged by the pandemic.

Shares

Prefer or defer? Sector and investment themes for 2021

It's time for equity prices to more closely tie to a company’s underlying near-term earnings trajectory and financial strength. Despite the market trading at record levels, some stocks have been left behind.

Retirement

Is cancelling the SG increase a retiree version of ‘Buy now, pay later’?

No doubt, any reduction or deferral in the SG increase would be received favourably by many. However, early access and lower contributions undermine the foundation of our super system.

Three ways to match housing affordability with good returns

This increased focus on affordable housing is welcome but the challenge is that investors typically require ‘market’ rate financial returns. By definition, social housing tenants cannot pay market rent.

Investment strategies

Investors face their own Breaking Bad moment

Savers are making small decision after small decision that leads them away from investing and closer to outright speculating. Time will tell if this ends in a bloody climax or we all live happily ever after.

Shares

Australian banks prove resilient but risks remain

Australian major banks reported a decline in financial performance in 2020 but as the impact of the pandemic evolves, the banks maintained a strong focus on customers. Is the renewed market optimism justified?

  • KPMG
  • 1 January 2020

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.