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Welcome to Firstlinks Edition 389

  •   7 January 2021

Weekend market update: A month ago, we were told it was 'nirvana' for the stockmarket to have a Republican win in the US Senate to balance a Democrat Presidency. Now the market cheers a Democrat control of both houses. Investors like everything at the moment, even ignoring the deadly impact of the more contagious strain of the virus. The S&P500 rose another 0.5% on Friday to give gains for the week of 1.8%, while Europe, Japan and China were even stronger. 

The Australian market started the new year with the best week in two months, with the S&P/ASX200 up 0.7% on Friday and 2.6% for the week. There was some weakness in property stocks as longer-term bond yields rose. The surge in the Australian dollar saw trades over US$0.78, reducing global returns for local investors.


The local All Ords Index started 2020 at 6,943 and, amazingly in such a turbulent year, finished at almost exactly the same level. Therefore, positive Australian equity returns from the broad index depended totally on dividends, and with the All Ords at 6,850 in November 2007, prices have gone nowhere in 13 years. But that overall index masks many great company successes, and in 2020, tech, resources and retail in particular enjoyed a stellar year. In the US, the S&P500 delivered a price return of 16.3% and a total return of 18.4% in 2020, and NASDAQ was up 44%.

While the All Ords significantly underperformed the US, let's acknowledge that despite the travails and worse experienced by many Australians in 2020, the majority of us would rather be here than anywhere else in the world at the moment.

So we'll start the year with a doff of the cap to Monty Python and a general theme for this edition:

"Some things in life are bad
They can really make you mad
Other things just make you swear and curse
When you're chewing on life's gristle
Don't grumble, give a whistle
And this'll help things turn out for the best
Always look on the bright side of life
Always look on the bright side of life" etc

The most optimistic chart released in recent days comes from APRA, showing loans subject to repayment deferral by banks have fallen to only 2.3% of all loans or $60 billion, from over $250 billion worth 10% of loans only six months ago. It's not only good for thousands of borrowers no longer facing growing debt, but the improved quality of bank balance sheets.

Australian investors who rallied against Labor's franking credit policy at the last election can also celebrate a long-term victory. Leader Anthony Albanese announced this week:

“I can confirm that Labor has heard that message clearly and that we will not be taking any changes to franking credits to the next election. I want the focus to be on Labor’s positive agenda for Australia’s future.”

And of course, investors in growth stocks and Bitcoin are also happy, with the crypto currency rising 300% in 2020. I have no idea whether it's a good investment, with its price now exceeding A$40,000. Whenever I am cold-called about an amazing investment opportunity, as happened with a Bitcoin promoter a couple of weeks ago, I have two instincts: hang up and sell.

The move by investors to 'looking on the bright side of life' was confirmed in a recent State Street global study based on actual trades by institutional investors:

"The Global Investor Confidence Index increased to 104.1, up 13.3 points from November’s revised reading of 90.8. The North American ICI rose 15.9 points to 103.5, and the Asian ICI increased 17.4 points to 112.6. Meanwhile, the European ICI fell for the fourth straight month, down 4.6 points to 87.2.

The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets."

Even when one of the world's most prominent and successful long-term investors issues a warning, he adds that it is "exciting and terrifying at the same time". Legendary Jeremy Grantham of GMO, who calls himself a 'bubble historian' having invested through four bubbles in the last 40 years, says he will enjoy the ride:

"But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time."

Wow! - "the most important event of your investing lives." Be prepared.

The stock most-regularly quoted as a sign of a bubble is Tesla. Investors are buoyed by their success and the ready availability of leverage pushes its share price to ever-higher levels on pure speculation. It is estimated that 'shorts' in Tesla, usually professional hedge funds, lost US$40 billion selling Tesla in 2020. At a value of over US$600 billion, it is worth more than the next six automakers in the world combined.

Warren Buffett's mate, Charlie Munger, was also feeling the dizzy heights in an interview last week. Maybe he's never heard of Monty Python:

“We’re in very uncharted waters. Nobody has gotten by with the kind of money printing now for a very extended period without some kind of trouble. We’re very near the edge of playing with fire.”

Closer to home again, the early access to super scheme has now closed with 3.4 million people withdrawing $36 billion. It's not a strain on a $3 trillion system, but it signifies a different approach by this government to allowing access and the eagerness of many to having the money now. The increase in the Superannuation Guarantee will be an major debate leading up to the scheduled rise to 10% on 1 July 2021. In theory, only the unemployed, those eligible for welfare or workers whose hours fell by 20% could access the scheme, but the ATO is relaxed, saying:

“Only in serious cases where an applicant has deliberately applied knowing they were not eligible will the ATO apply penalties.”

In this week's edition ...

For those investors who use the new year to review their portfolios, leading fund managers and product providers offer their top stock, fund and sector picks for 2021, collected in a special ebook (which complements our ebook issued before the holidays on the best interviews of 2020). Lots of good ideas to check.

As a final look back at 2020, we highlight the 20 most popular articles, all of which received over 10,000 views on our CMS records. The wide range of subjects show the great diversity of interests of our engaged audience.

Gazing into 2021 (and mainly continuing to 'look on the bright side of life'), three reviews on what the year might bring:

  • Phil Ruthven gives his provocative views on how we should live and work in future, including reacting to pandemics and the structure of our nation's institutions.
  • Jonathan Bailey looks at lessons learned from COVID and an unexpected business response to become more aware of ESG responsibilities.
  • Randall Jenneke finds reasons for optimism about both the Australian economy and company prospects, including identifying some stocks.

Regardless of whether it's a good time for putting more money to work in the market, it's always the right time to consider portfolio construction. Philip May provides a post-retirement investing framework which divides your money into different categories to help manage retirement.

Finally, in a variation from tradition in our 'white paper' section and in keeping with our theme, a short video from AMP Capital's Shane Oliver on Five Reasons for Optimism in 2021.

One New Year resolution from all this, despite difficult markets, rioting in the streets in the US Capitol and rising virus cases, is that we can find reasons to 'look on the bright side'.


Graham Hand, Managing Editor


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