2021: The outlook for Australian equities

Paul Skamvougeras

Paul Skamvougeras

Head of Equities, Portfolio Manager
printer icon Adobe PDF icon

It was a year like no other. Extreme volatility and uncertainty gave way to bear and bull markets, but perhaps more importantly, it presented opportunities to invest in the market.

The Lucky Country

In Australia once again we are the Lucky Country. But I believe you make your own luck. And the reality is, Australia has done a great job managing the health issues around COVID. The government has stepped up in a timely manner to provide fiscal stimulus to support the economy. And that really leaves us in good stead. And it's no accident that we're in the position that we are today relative to other countries around the world. So, it is important to have the vaccine rolled out, but I think Australia is somewhat different to the rest of the world. We are in a very good relative position on that front. So that's why we're so confident that the Australian economy will react better as we come out of this downturn.

A year like no other

Reflecting on 2020; it was an extremely volatile year in markets but also a very challenging year. It was all about COVID and initially the market was reacting to economies being closed globally, even our own, and you saw that with the very sharp sell-off in March in particular. And we've seen the flip side more recently, a very strong rally in markets and a rebound on the back of an effective vaccine, easing monetary policy, and also a lot of fiscal policies, spending policies that have been announced by governments. So, from the March lows, the Australian stock market is up more than 40% which is quite an extraordinary performance. So, we've seen a bear market and a bull market all in one year. That type of volatility is extreme, and you wouldn't have blamed anyone for going to cash in March given the uncertainty in the headlines that we were reading in the paper. but, having said that and from our point of view, we saw a lot of buying opportunities. So, we topped up on some of our stocks that we already held in our portfolio, but it also gave us the opportunity to top up on some other companies that we thought were great buying opportunities. Companies like Qantas (ASX: QAN), Aristocrat (ASX:ALL) and Ramsay Health Care (ASX:RHC).

Record month and signs of a rotation to value

November was a very strong month for the Australian Stock Market and markets globally. We saw a strong rotation into value stocks and we're a value manager, so we saw the benefit of that in all our strategies. All our strategies outperformed. And the reason for that is the market is anticipating an economic recovery and that's where value does really, really well. So, if you look at some of our stock portfolio holdings, Oil Search (ASX:OSH) was up 40% in the month, Fletcher Building (ASX:FBU) up 39%, Event Hospitality (ASX:EVT) up 30%. These are companies that are very sensitive to better economic growth, and we're starting to see that manifest in share prices and earnings in time.

2021 Outlook

The Aussie economy is robust at the moment, and we believe that will continue. Consumer confidence is high, house prices are holding in, and that holds us in good stead as value investors. So, we think that the outlook is quite healthy.

A resurgence in mergers and acquisitions

One of the other things that I think will be interesting in 2021is that we've started to see the first signs of M&A in the market. And we think that's a continuing theme, especially for 2021. And most of the companies that we're seeing that are being taken over, or where there is corporate interest, are all these reasonably priced companies that the market doesn't think are too exciting, but actually are reasonable businesses. And that's really in our wheelhouse. We think that there will be an M&A cycle and we will see that in 2021. And we're starting to see that already across our portfolio.

It won’t be a year without risks

What are the risks for 21? The risks are interest rates, I think there's a big complacency around the level of interest rates and people expecting them not to go up at all. Now that's a big X-factor for the markets but also the valuation of the market is quite high. When you look at industrials excluding financials for the ASX 200, it's at all-time highs, and obviously anticipating what we believe will be a recovery and a recovery in earnings also. The market is anticipating a recovery and so the risk is that the recovery doesn't take hold as we expect, and it doesn't manifest in earnings and then we get a sell off because valuations are high. Now, obviously it's a relative game and we are invested in companies that we believe are representing relative value, but we are also dependent and expecting an earnings recovery. And if that doesn't manifest there is risk to the market and to the market levels.

Value poised to benefit from an economic recovery

From our point of view as value investors, it's set up quite nicely and we think that being exposed as we are to domestic cyclical companies, and underweight US dollar owners, we think that it holds us in good stead for the year ahead. And value always outperforms out of any downturn. We saw that during the GFC, and we believe that we are starting to see that rotation now. So, again our focus doesn't change, we're looking for high quality companies with good management teams, conservative balance sheets that are reasonably priced.


Find out more about Perpetual's range of Australian Share Funds.

This information has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not indicative of future performance. To view the Perpetual Group's Financial Services Guide, please click here.

No representation or warranty is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in video (any of which may change without notice). To the maximum extent permitted by law, the Perpetual Group, its directors, officers, employees, agents and contractors and any other person disclaim all liability and responsibility (including without limitation any liability arising from fault or negligence) for any direct or indirect loss or damage which may be suffered through use or reliance on anything contained in or omitted from this video.  No reliance may be placed for any purpose whatsoever on the information included in this video or on its accuracy or completeness. No person, including the Perpetual Group, has any responsibility to update any of the information provided in this video.

References to stocks in this video are for illustrative purposes only and are not recommendations, and the stocks may or may not be currently.

This video may contain forward looking statements, including statements regarding PIML’s intent, objective, belief or current expectation relating to investments, market conditions or financial condition. These are based on current expectations about future events and are subject to risks, uncertainties, which may be beyond the control of PIML. Actual events may differ materially from those contemplated in such forward looking statements. Forward looking statements are not representations about future performance and should not be relied upon as such. Neither the Perpetual Group nor PIML undertake to update any forward-looking statement to reflect events or circumstances, subject to its regulatory and disclosure requirements.

The information is believed to be accurate at the time of complication and is provided in good faith. This document may contain information contributed by third parties. PIML and PSL do not warrant the accuracy or completeness of any information contributed by a third party. Any views expressed in this document are opinions of the author at the time and do not constitute a recommendation to act. This information, including any assumptions and conclusions is not intended to be a comprehensive statement of relevant practise or law that is often complex and can change.

No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.