Seeking opportunities amid the vaccine ‘miracle’
Infrastructure, healthcare, building supplies, and job-seeking sites are worth a look in the new year, say local asset managers.
The vaccine “miracle” and the transition to a Biden government have boosted optimism among local asset managers as 2021 approaches.
And despite the tapering off of the JobSeeker and JobKeeper subsidies, the record low cash rate of 0.10 per cent will make paying off fiscal deficits easier. The “fiscal cliff” that was feared earlier this year may indeed remain a distant memory.
As for investing opportunities, 2020 has unearthed new trends and accelerated others. Healthcare, building supplies, online job-seeking sites, and infrastructure are among the sectors where Australian asset managers see opportunity. And yes, tech will still dominate.
Fidelity’s head of Australian equities Paul Taylor says interest rate rises are probably a year of two away and that the government largesse will change from “helicopter money towards significant infrastructure development.”
“When we look back to this period in five years’ time, we will view it as an excellent time to have invested in the market,” Taylor says.
Covid accelerated investing themes that Taylor argues will continue to shape the future. He singles out: working from home; infrastructure; cashless payments; and active wear.
Covid also snapped Australia’s almost three-decade run of uninterrupted growth. But there was little time to ponder the “technical” recession.
“Although GDP may contract by 4 per cent plus in 2020, this is old news,” says Randal Jenneke, head of equities at T. Rowe Price. “A strong rebound is forecast for 2021, and we regard the Australian economy as being in as good shape as any of the developed economies.
“Australian society is largely back to normal, companies are seeing activity and profits rebound and Australians, with few foreign travel options, are spending more at home, with the result that some areas of the domestic economy are doing well.
"Australians typically spend more on tourism and foreign travel than other OECD countries as much greater distances dictate longer holiday trips.”
Short‑term costs and disruption from the coronavirus do not detract from the longer‑term attractions, Jenneke says.
Australian equities are less at risk from a small number of highly valued large‑cap growth stocks, with returns that are more evenly distributed across sectors.
For BetaShares chief economist David Bassanese, the “most critical issue now facing markets” is inflation, which he says must remain low if interest rates are to stay put.
“Central banks are promising to keep rates low for one to two years, which is supporting the economy and financial markets and also provides a ramp for equity prices.”
Bassanese is bullish on share markets, noting that it’s likely equity prices will be higher than they are now in 12 months’ time.
Valuations are a bit stretched, he says, with high PE values reflecting the low interest rate environment and anticipated earnings recovery. But given rates should stay low, it implies PE values could also remain relatively high.
Bassanese anticipates 15 per cent growth in forward earnings by end-2021 if current expectations persist.
A cloudier global outlook
What about the global outlook? For Ron Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, it is quite mixed against the backdrop of challenging crosscurrents this year, particularly in Europe.
Yes, there’s a vaccine, but getting it into 7.8 billion arms is a rather large task. And the next six months will likely be a choppy transition to the post-pandemic investing environment later in 2021, Temple says.
“On the positive side, the US election has passed with a market-friendly outcome and three COVID-19 vaccines appear to be within weeks of initial distribution, with more likely to follow. Typically, these events would be the signal investors need to shift out of defensive work-from-home beneficiaries into cyclical recovery plays.
“However, major developed countries across the Northern Hemisphere are facing new record levels of COVID-19 infections, spurring new economic lockdowns and increasing the risk that many companies, particularly small businesses, might not make it to the other side of this pandemic.
The successful development of vaccines by Pfizer, Moderna, and AstraZeneca and the University of Oxford in less than one year is a modern scientific miracle, Temple says. But he warns it will probably take until 2024 to produce enough doses for the whole world, with the poorest countries at the back of the queue.
“Once a country does gain access to doses, logistics and delivery problems could create severe bottlenecks that will widen inequality and create long-lasting damage to economies.”
Opportunities and risks
As for opportunities among Australian equities, Jenneke cites medical device manufacturer ResMed (ASX: RMD). He says the company is well placed to return to strong growth in its sleep apnoea business over the next six to 12 months.
“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.”
BetaShares’ Bassanese singles out three themes: the tech sector, quality investments, and the US. He sees the rotation to so-called value parts of the market such as energy as temporary and expects growth areas such as tech to reassert themselves.
Locally, he expects resources and financials will do reasonably well over coming months. But he says investors can expect outperformance in infrastructure as the country gets through the pandemic.
Fidelity’s Taylor says crises often present opportunities to invest in long-term structural growth companies at attractive valuations.
Fidelity’s Australian Equities Fund, rated gold by Morningstar, is invested in large-cap highly liquid blue-chip stocks, Taylor says. But with that comes a word of caution on the banks.
“We favour high-quality companies with a sustainable competitive edge, strong free cash flow generation and robust earnings growth.
“At the same time, we maintain a cautious stance towards Australian banks overall. Their business is experiencing competition from technology-driven innovation, and banks that fail to keep pace will see erosion in business.”
Looking at global investing, Temple says that while there is light on the horizon, investors must avoid taking on too much risk.
In the US, he expects significant policy changes from Biden, but not without legislative gridlock. Central banks meanwhile will continue to try to stimulate growth.
“Going into 2021, investors will still face difficult decisions regarding sources of income, diversification and capital appreciation.
“We would encourage focusing on bottom-up fundamentals for each individual security, while also avoiding the instinct to move too far out on the risk curve.”
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