CATCH THE RECOVERY WAVE

In an unpredictable year that will go down in the history books, Covid-19 and its tumultuous impact on stockmarkets took most investors by surprise. And equities ended 2020 almost at the same level as they were at the beginning of the year. But 2021 marks a fresh start, and it should be a strong year for the stockmarket and economy, as investors look to a post-pandemic world.

Australia’s economic growth is set to exceed prior gloomy expectations as restrictions ease, borders re-open and vaccines are rolled out. This is at a time when business and consumer confidence is rebounding, interest rates are at a record low and savings rates are at a record high, encouraging spending and borrowing. At the same time, global governments and central banks are stimulating their economies and increasing infrastructure spending (on roads, rail, government buildings, etc), which boosts demand for Aussie commodities (namely iron ore, copper and nickel).

These are all reasons why the market is expected to have a positive year with many investment managers predicting the S&P/ASX 200 to rally 8%-10%. Meanwhile, earnings per share (EPS) growth looks set to rebound 15%. As with any market rallies, there will be leaders and laggards.

There are three key themes to consider when investing in the year ahead.

Cyclicals to shine in a V-shaped bounce

Australians have been breathing a collective sigh of relief as the economy charged out of its first recession in 29 years. Gross domestic product grew by 3.3% in the third quarter, after a 7% plunge in the previous three months. The rebound was also ahead of the 2.6% growth expected. The resounding bounce was led by a huge (8%) jump in household spending as people returned to cafes, restaurants and leisure activities. It confirmed that the massive fiscal stimulus and interest rate cuts are supporting the economy.

We are in a domestically led V-shaped recovery. Consumer

confidence has surged to a 10-year high, business confidence popped to a two-year peak, the majority of people who lost their jobs were re-employed at the end of 2020, most of the loans on hold or in arrears were being repaid, while interest rates are at 0.1%.

This all largely supports economic growth and the recovery in the stockmarket, particularly as Victoria had emerged from stage four lockdowns and mass restrictions had eased in NSW.

Just before Christmas clusters emerged in NSW and Victoria. Some domestic borders were closed and restrictions reintroduced. This will likely cause a few economic speed bumps in the much anticipated recovery. So you could expect the first quarter of 2021 to see slightly weaker growth. But after restrictions ease, a rebound in growth and a positive year should be on the cards.

Meanwhile, the UK rolled out the first Pfizer-BioNTech vaccine, followed by the AstraZeneca jab – both world firsts.

Across the Atlantic, the US followed, rolling out Pfizer’s vaccine, while India approved the rollout of two vaccines there.

Dose of confidence and optimism

So markets are starting to price in what global economies will look like as growth steps up a few notches. Australia is expected to have three vaccines in circulation in 2021, with the rollout beginning in March to the elderly and vulnerable.

While a major outbreak in Australia or a setback in vaccine effectiveness could change the outlook, a V-shaped recovery is still expected (despite restrictions ramping up in NSW in late December). Australia is also likely to have fully recovered from the economic downturn by the end of this year, with growth of 5% in 2021 and 4% the year after, according to the Reserve Bank. Citi, in fact, expects Australia will be back at pre-pandemic levels by the end of the current quarter. This is well ahead of other nations’ recoveries.

In this environment, cyclical sectors that were hit the hardest, such as energy and resources, financials, travel, property and telecommunications are likely to see a rebound in earnings. Businesses are more optimistic about the outlook for trading and profitability and business confidence has rebounded to pre Covid-19 levels. Investment, employment and innovation will likely pick up, as could output and earnings. This is why cyclical stocks in these sectors tend to outperform when an economy is in its growth phase.

Stocks to consider

With all this in mind, think about cyclicals (stocks tied to economic growth), that could do well; we think airlines, travel and tourism companies could be some of the best winners this year, as Australians look to spread their wings after being cooped up for almost 10 months. Don’t forget households’ savings are at an all-time high. Flight Centre is a top pick in the tourism sector. It was hit as global travel ground to a virtual halt amid national shutdowns and travel restrictions. However, Flight Centre’s liquidity of $1.3 billion far exceeds its monthly cash outflow of around $40 million. This should allow Flight Centre to overcome a deep and prolonged downturn before emerging on the other side of Covid-19 as restrictions ease. Other downbeaten stocks likely to make a comeback this year as economic growth enters the next phase, include investment management firm Challenger, telecommunications service provider Uniti

Group, construction and property giant Lendlease and toll road operator Transurban.

Tech to benefit from multiple tailwinds

Expect the tech sector to be propelled even higher in 2021 on the back of major behavioural shifts that have accelerated due to the pandemic. As cities around the world went into lockdown, people turned to technology to connect. This changed our daily lives – the way we shop, seek entertainment, work and learn. And we believe these habitual changes will be long lasting.

Think about how many people you know who have been told by their employer they won’t need to return to the office. Two of my friends have been told they can work from home indefinitely. Research indicates the work-from-home trend is likely to stay.

A survey by global real estate outfit JLL of more than 2000 officer workers in 10 countries found 72% of them want to continue working from home and a majority want to do so for an average of two days a week.

And it seems many employers are happy to comply. Twitter and Slack, for instance, have allowed their workers to work from home indefinitely while Google and Microsoft are among the many companies that plan to accommodate varying degrees of remote working. This trend supports tech companies in areas that facilitate working from home, such as cloud computing, online education and online retail.

When it comes to shopping, the pandemic accelerated the shift to online retail. Global quarantine measures increased online shopping for many, including previously reluctant older demographics. All in all, the ecommerce industry is set to nearly double to $US6.5 trillion ($8.5 trillion) by 2023.

The pandemic has also significantly transformed the way we spend our leisure time, a trend that’s likely to remain. Online gaming has exploded: 30% of surveyed US consumers now subscribe to an online gaming service and 41% play online games either daily or weekly.

Another trend to watch is remote learning. The pandemic forced the global education system to flip on its head. As such, the international education market is tipped to grow at 4.5%, from $US5.9 trillion in 2018 to $US10 trillion by 2030, according to Bell Potter research.

The final tech sector driver is the surge in contactless payments, from cash and credit cards to digital services. Bell Potter estimates that the global contactless economy could double to around $US300 billion in 2024 from $US147 billion in 2019.

Stocks to consider

Top contenders include buy now, pay later provider Afterpay, online fashion retailer City Chic, cloud software company Rhipe, Domino’s Pizza and Aristocrat Leisure.

Miners profit from global growth

Commodity markets are roaring higher following the collapse in early 2020. Demand is likely to strengthen as countries increase infrastructure spending, while global growth is ramping up, all fuelling commodity demand. The price of Australia’s biggest export, iron ore, rose more than 70% in 2020 to a seven-year high as demand from China increased, while supply was slashed by Brazil’s Vale. China plans to double the size of its economy over the next 15 years. This requires extra steel, of which iron ore is the main component, required for building build roads, schools, rail networks and commercial property. China’s Belt and Road initiative, which aims to connect China to East Asia, Africa and Europe, also consumes a lot of steel.

Stocks to consider China produces around 90 million tonnes of steel a month. And half of its iron ore needs are met by Australia. For the medium term, this is not expected to change. This means you could expect earnings of Australian iron ore majors like BHP and Fortescue Metals to continue to grow. Nickel is also used in steelmaking and its price has risen to its highest level in a year, on the back of rising demand from China’s steel mills. One of the biggest pure-play nickel exposures on the ASX is Nickel Mines. Its shares surged more than 70% in 2020 as the nickel futures price rallied. Adding to the upward price pressure, supply has been restricted. Indonesia has a ban on exporting unprocessed nickel. At the same time, demand for higher-grade material for battery-grade nickel from producers in Germany and Indonesia continues to surge.

Other stocks to watch as global growth picks up include Emeco (mining equipment), Beach Energy (oil and natural gas) and BCI Minerals (salt and potash).

Jessica Amir is a market analyst and media presenter for Bell Direct, Desktop Broker, and Bell Potter online. She has more than 15 years’ experience in financial markets and has also worked as a finance TV broadcast journalist.