Morningstar Year in Review 2020

-- | 25/12/2020 Text size Decrease

Emma Rapaport: Hi, I'm Emma Rapaport. Welcome to Morningstar's final video of the year. What a crazy year it's been to look back on. 22 days, that's all it took for the S&P 500 to drop 30 per cent, the fastest fall of this magnitude in history. And who could forget the toilet paper panic? For most of 2020, there really was no other story. But what will 2021 bring? We've reached out to analysts and to the Morningstar editorial team to get their reflections on 2020 and hear how 2021 might play out. Jody Fitzgerald: 2020 will be known for the shortest bear market in history. Typically, a bear market, so a period of underperformance of the equity market, usually lasts for around a year. This one, when you actually look at the S&P 500, lasted only 33 days. So, on the surface, markets have recovered, but the recovery is being far from uniform. So, one of the biggest names of 2020 will actually be the divergence in performance between asset classes, between countries and also between sectors. Brian Han: I think the highlight from 2020 for the sector was the fact that I think COVID-19 really demonstrated how critical telecommunications infrastructure is empowering our digital economy these days. I mean, without it, none of these working from home, playing from home, everything else from home, none of that could have happened, and we'd all be twiddling our thumbs during this pandemic. Christopher Franz: There's this whole section of the market that benefited from these conditions. Think about the stacks that were placed to work from home, something like a Zoom or these technology companies and even like the workout from home, like a Peloton. So, if you had global managers that were exposed to that trade, they had quite the year. Conversely, managers with exposure to more capital-intensive businesses, think maybe resources or energy, those directly affected by the pandemic, they tended to suffer in 2020. And while there has been a rebound, they haven't rebounded as well as their growth many peers. Nathan Zaia: So, most of the highlights were pretty bad for the banks. The only one good thing I would call out is how well the regulators, banks and government worked together to try and buy people time, so we didn't have this avalanche of people defaulting on their loans and enduring hardship. And the real key thing for the banks in that are obviously the profits but they didn't have to go and raise huge amount of capital when their share prices were being smashed really. Cash rate cut to 0.1 per cent. That's really hurt the banks' earnings and deposit holders. And the regulators putting a cap on dividends at 50 per cent and even making the banks to defer their decisions for a while. Johannes Faul: TP, toilet paper. I think that really sums it up what we've seen in the sector, and it's been incredible distortions in how consumers spend their money. But what we've seen is some retailers benefiting massively during the COVID period, during the lockdowns, and so are frankly. And that's really been the big surprise and an unexpected development in 2020 that I don't think anybody had foreseen in January. Ksenia Zaychuk: So, I think the biggest takeaway for me was that not every asset that is labeled defensive will necessarily act as defensive and the events of 2020 prove that. For example, property and infrastructure are considered to be defensive assets and they have uncorrelated risk and return characteristics as well as they provide high quality and stable income. However, that was not the case in 2020. Peter Warnes: So, when this market was compounding in March and hit a low on the 23rd of March, I think over 75 per cent of our recommendations went into the 4 or 5-Star zone telling our subscribers to buy. And I'd urge our clients to squirrel away cash and so we did have some option when things like March occurred. It elevated our long-term valuations and the reasons why they're there. Adam Fleck: So, we thought there was a lot of value in the market. We called out the fact that we thought the market had really overreacted to the news, particularly considering the long-term impact from this pandemic which we see as relatively minimal. One of the many low lights was it was a very short window of opportunity. The market now looks nearly 15 per cent overvalued and there's far fewer 4 and 5-Star stocks, only about 20 per cent of our coverage. So, while there's still opportunity, it's far less than what we thought, and I think that makes it challenging for investors thinking longer term. Lex Hall: I think the highlight for me was probably the story we did and the interview we did with NabTrade's Gemma Dale, in which she told us about the COVID itself and how retail investors reacted and how the story was that they piled into the market. They showed a lot more sophistication than people normally say they have. They bought at the right time. They profited from a historic sell-off. So, I think that was a really interesting development. Graham Hand: We've had a discussion on whether superannuation should go from 9.5 per cent up to the 10 per cent legislated next year with a serious debate about whether that money would be better in people's hands in the current day, particularly for people to be able to buy a house because we realise how important owning your own home in retirement is, perhaps more important than having a higher superannuation balance. Grant Kennaway: So, I think it's really a coming of age for ESG investing this year, and I really feel like that that has been a highlight and it's being driven by bottom-up demand from retail investors. It's not top-down regulatory change. It really is just engagement from retail investors with wanting to align their investments with their values and that for me is the real highlight of the year. Peter Warnes: The other highlight was that I survived and hopefully most of our subscribers did as well. Christopher Franz: So, hopefully, in 2021 you see the retreat of COVID-19, and with that the question remains the rebound that we've seen in global markets thus far in 2020, is that pulling forward future growth as a result of monetary policy and stimulus? Or is that perhaps a sign of a new decade to come, maybe a new roaring 20s? Graham Hand: Normally, when you have a party and you go out and get drunk and have a good time, you get a headache later. There's a time you have to pay for all of this economic stimulus that the government has provided. So, I'd be looking in 2021 not just for this sort of recovery phase, but when the payback happens. Johannes Faul: Looking forward to the next year we believe a lot of that momentum is going to go away and sales growth might turn negative for quite a few categories over a few months. Brian Han: I think that may be the theme for 2021 in terms of how can telecommunications operators gain more margin out of all that data usage and all that capacity usage. These telco operators don't get any more margin out of servicing these higher capacity and data usage. So, I think that will be one of the key things. Nathan Zaia: Some hard numbers around what the banks can do to their cost base is one thing we're looking for. We think the peak is probably past us in terms of how higher loan impairment expenses will be. So, that will be another positive to support an earnings rebound. These banks have pretty big capital buffers now. So, I think the dividend deferrals and suspensions can be pretty much – they'll be behind us, I think. Jody Fitzgerald: So, what we actually anticipate is that 2021 will be a really good year to be a value investor and to be holding cyclical positions that should benefit from an improvement in economic activity. Lex Hall: I think we will be writing about the search for income. The rotation into different stocks will be a priority. Tech stocks, too frothy. I think we'll be writing a lot about that. We may be writing more about cryptocurrency, because we could see a lift in both Bitcoin and other currencies such as Ripple. So, that could be something to watch. Adam Fleck: We're likely to see pretty heavy growth rates, particularly as we lap some of the challenging periods in the calendar second quarter of 2020, and there's going to be, I think, a lot of pent-up demand in some sectors. But I think we as investors need to be very careful about what sector we're thinking about and how that looks on a month-to-month basis. Some sectors like the consumer defensive space, particularly say grocery and that retail area, they are going to face some challenging comparisons. Many of us were at home. We were cooking more. The grocery stores did very well. That's going to be tough to grow off of that very strong period. Peter Warnes: The theme for 2021, this is not a walk in the park. Caution and volatility will still be prevalent and therefore prudence and care around the money that you have been able to save, now, in the investing time, be careful. Shani Jayamanne: So, thank you so much for a great 2020. We've loved getting to know you through our podcasts and our webinars as well. We've learned the name of your (OutPackers), and we've had people make fun of Mark's wrinkled shirts that he wore on the webinars as well, and we hope that we've really helped you and what you wanted to accomplish as an investor. Mark LaMonica: Yeah. So, thank you very much. It's been a great year in some ways. But we're really excited about next year. I will buy an iron over Christmas. So, I will come back and no more wrinkled shirts. But we're both really excited to continue to connect with all of our subscribers and just investors around Australia in 2021.