As we detailed in November, the vaccine trials have been higher than people expected in terms of efficacy. Giving equity markets broadly the luxury of glossing over near-term risks and focussing on the prospects of vaccine rollout and activity normalising next year. Hence, we continue to remain constructive on a medium-term outlook and focus on using any corrections to add to reopening trades (E.g. Cyclicals, small caps, commodities, emerging markets). For pro-cyclical stocks there is more room for normalisation and these sectors can look past immediate risks through to benefits a vaccine can provide.
Australia, despite having outperformed with respect to the COVID induced economic hit has lagged DM peers in terms of equity market performance. Australia’s relative success in containing the virus lends less relative upside from the vaccine. In addition, Asia also benefitting from the engine of China’s reflationary regime with broad scale infrastructure and construction stimulus, along with continued dollar weakness supporting flows into higher beta emerging markets. Added for Asia is a more favourable geopolitical tailwind with the incoming Biden administration expected to be less volatile in their approach to China vs. Australia still very much in the thick of an ongoing spat with China.
Although there are individual stocks and sectors that have been impacted by the AU/China tensions, the reopening and recovery in earnings and economic growth should take precedent at an index level. (Caveat – providing high value exports like iron ore do not come into the mix). In addition, for Australia the aggressive virus elimination strategy, with international border restrictions seemingly in place for a lengthy period at this stage, is an ongoing headwind for education and tourism – two high value services exports.
However, the period ahead should bring plenty of opportunity for catch up, particularly taking into consideration the ongoing and overwhelming virus caseload, lockdowns and economic drags experienced by other regions, compared to a relatively virus free Australia. Of course, the hit to global activity and restrictive measures in place domestically still present a drag on Australia’s economy, but with a vaccine rollout ahead, earnings rebound in play and the prospect of regional travel bubbles in the pipeline Investors have something to look forward to which should see the index on a better footing into year end.
In addition, the resource heavy nature of the index could see the index shifting from underperformer to outperformer in the year ahead as various commodities rev-up into 2021 with a vaccine rollout, demand bounce back and fiscal spending tailwinds. Exposure to other investing thematics like the ESG/green transformation via battery metals, rare earths, copper and the like, also providing opportunity for investors.
As we transition toward an inflationary regime, with a synchronised global growth reacceleration coupled with unprecedented liquidity injections against the backdrop of extraordinary fiscal stimulus, we see a shift in market leadership toward cyclical sectors and geographies, real economy stocks, non-US markets and commodities. Therefore, the more cyclically orientated nature of the ASX 200 should support index performance throughout 2021 as the reflation rotation takes charge.
Financials, a heavyweight on the index will also be a driver in the year ahead. The rebounding growth picture along with higher yields supports the asset allocation from a macro standpoint. In addition for Australian banks a recovery in the housing market, buybacks, and better than expected outcome for bad debts will support the outlook for the sector.
For commodities, huge supply deficits with structural underinvestment, a vaccine-led recovery in global demand, green transformation tailwinds, and the engines of a weaker dollar plus higher inflation, coincide with a historic underweighting and a multiyear bear market to bring a broad commodity rally in 2021 – A trend that Australian stocks will benefit from.
Australian stocks with an abundance of commodity exposures present many selective buying opportunities for investors, as this regime shift is undertaken.
Energy - Aus Energy Sector still trades well below pre-COVID levels
Beach Energy (BPT:xasx)
Oil Search (OSH:xasx)
Copper – Green electrification tailwinds meets supply deficits
OZ Minerals (OZL:xasx)
Lithium/Nickel – Green energy/EVs/Battery Metal
Galaxy Resources (GXY:xasx)
Pilbara Minerals (PLS:xasx)
Western Areas (WSA:xasx)
Poseidon Nickel (POS:xasx)
Panoramic Resources (PAN:xasx)
Nickel Mines (NIC:xasx)
Rio Tinto (RIO:xasx)
Fortescue Metals (FMG:xasx)
Uranium – Supply squeeze due to low prices meets increasing demand with busiest global nuclear build program in decades
Lotus Resources (LOT:xasx)
Peninsula Energy (PEN:xasx)
NexGen Energy Ltd (NXE:xtse)
Vimy Resources (VMY:xasx)
Rare Earths - ESG, National Security (non-Chinese supply), and EV exposure converge
US forming a Uranium + Rare Earths strategic reserve (MP Materials' Mountain Pass Mine will now become an even more valuable US strategic asset) - MP Materials Corp is one of the only ways to get exposure to American Rare Earths.
Post our initial buy recommendation in 2018, Australia-based Lynas remains in a pivotal position, as it is one of the only miner and processor/producer of rare earths worldwide outside of China.
MP Materials (MP:xnys)
Vaneck Rare Earth ETF (REMX:arcx)