In many ways, an investor’s job is to work out what the world might look like a year down the track. Will economic growth look worse or better than current conditions? Will it be easier or harder for companies to grow profit? Let us look down the road to see what 2021 might bring.
“Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria.” – John Templeton
While most in the market are incredibly positive on the outlook for economies and the sharemarket in 2021, many individual investors remain nervous about a correction. I usually talk to a couple of investors a week, with such big fears of a correction that they have the majority of their money in cash.
Corrections are a normal part of the market and it is natural for there to be at least one, if not two, corrections a year. These are downward moves of typically 5-10% but at times as large as 20%. The key is to remember that these are normal movements for the market and embrace them rather than be scared by them. Crashes are larger moves and are usually triggered by a crisis. These are more unusual in nature but tend to happen at least once a decade. The Australian sharemarket fell 7% in 2018 only to rise by 18% in 2019. That’s volatility. During the Global Financial Crisis, the market fell 54% and didn’t recover for more than a decade. That’s something else.
So where are we now? While there is still some scepticism around the market move upwards, it’s starting to dwindle, as the US stock market continues to make record highs and the Australian market hits almost 12-month highs. These are positive signs of strength for investors.
Firstly, supporting the sharemarket rise is the fact that Central banks and governments have been coming to the rescue for the global economy which will see GDP increasing everywhere. 2021 is the year of synchronised growth as the global economy comes back from the COVID-19 induced recession.
Secondly, the earnings outlook is positive for companies. Earnings growth for the ASX 200 is expected to be at +10% this financial year.
While there is some risk that there is a bubble inflating, it is more likely that we are at the beginning of reflation than irrational exuberance. Bubbles in my mind are all about time horizon. It happens as investors and speculators focus on shorter and shorter time horizons for their returns.
Given the positive backdrop for the economy and earnings, what sectors do we like?
With growth in focus, it is time to be overweight commodities and financials. Both sectors perform well when economies are growing.
There are also government incentives driving activity. Instead of a housing crash down, we are seeing a housing crash up. Detached housing approvals in December 2020 were at record highs in Australia helped along by the Homebuilder grant. Housing momentum should continue for a while. At Burman Invest, we are positive building material companies such as James Hardie and Boral.