Investing

THE BIG QUESTIONS FOR 2021

WHAT WILL BE THE STANDOUT SECTORS IN 2021 AND WHAT DO INVESTORS NEED TO WATCH OUT FOR?

Q It’s clear 2020 is a write-off from an economic perspective. Australia experienced its deepest recession in modern history – the one that we “had to have”, this time due to the Covid-19 crisis.

We have not been alone: 93% of the world’s economies have been in the same boat. But unlike many of our developed economy counterparts, it appears as if we have been able to get the public health crisis under good control. Indeed, many other countries are experiencing a second wave that dwarfs their first.

Assuming Australia continues along this path, which will be bumpy no doubt, we should experience a better year in 2021, economically, than many other nations. Policy support from government and the Reserve Bank will remain accommodative, to help ensure the ride is less bumpy and to bring the unemployment rate down as quickly as possible.

This will have implications for households and their investments. For a start, there’s no good news for savers, as at-call and term-deposit rates will remain historically low. This is because the RBA has moved official interest rates to as low as it dares and told us not to expect any increase for at least three years. It is also engaged in quantitative easing, pushing three-year interest rates to the same level as the policy rate. This means there’s little to be gained from locking away savings in term deposits.

What’s bad for savers might be good for property owners and buyers. We are just starting to observe a recovery in the property market and this should continue in 2021. Yet this is a little more challenging for investors than owner-occupiers. This is because returns over the longer term, without any further interest rate tailwind, may be materially less than they have been historically. Further, rental property demand may be weaker than historically, at least in coming years, as population growth from overseas migration remains suppressed.

The outlook for sharemarkets is much more uncertain. Global shares, in particular in the US, have staged a remarkable recovery, largely in response to trillions of dollars’ worth of support by global central banks. But more and more stimulus won’t be forthcoming forever and these markets will rely on how well economies are doing through the recovery, and that remains uncertain.

While the economic recovery is underway, the path back to where we were will be a long one with a fair share of potential setbacks. The inevitable volatility that such an environment brings means investors across assets are likely to remain cautious for some time.