Australia 2021 - Positioned for outperformance
CIO MONTHLY | NOVEMBER 2020
Amid the resurgence of offshore virus cases and the imminent US election, we take time to focus on Australia in this month’s edition of CIO Monthly. We canvass the reasons why the economy and currency could outperform in 2021 and the sectors of the equity market that could profit most.
- For much of the world, the outlook for near-term growth has become more uncertain over the past month – but for Australia, the economic outlook has improved, and the path for growth in Australia will likely be stronger into year-end than in other major economies. There are three key reasons why the outlook for Australia is better - sharply improved COVID-19 new case trends; additional monetary and fiscal support; and continued outperformance of the Asian region. While the growth outlook has improved, there are likely to be headwinds for the consumer over the coming year. Behavioural changes due to the pandemic may continue to weigh on consumer spending patterns. In addition, fading direct government handouts and a weak jobs market will likely act as a drag on activity.
- Amid the elevated uncertainty currently in global markets, together with expected further RBA easing, the Australian dollar is vulnerable to near-term downside risks. However, consensus continues to expect a weaker US dollar trend in 2021 to underpin a steady rise in the Australia dollar. CBA is targeting USD 0.76 mid-2021 and USD 0.78 end-2021, while UBS forecasts USD 0.77 by the end of next year. Gains against other currencies are likely to be less significant.
- There are several reasons to suggest domestic equities will outperform their global counterparts. Some of these reasons are macro related, such as Australia’s success in containing COVID-19 to date. Other reasons are more tactical, such as Australia’s more benign position with regards to event risk. In the context of a highly anticipated US election, the US fiscal impasse and pending deadlines surrounding Brexit, Australia stands out as being a market where investors can make single stock decisions without the overhang of major political uncertainty. Finally, other reasons why domestic equities look set to outperform reflect valuation. On a one-year forward price-to-earnings basis, domestic equities are trading 12% cheaper than the S&P 500 – not far from the 14% lows of the past decade.
- At a sector level, the banks stand out as a key beneficiary of an improved macro environment. Driving this is the easing of responsible lending rules, as well as an interest rate environment where most of the damage has already been factored in and valuations are below book values. Other sectors that look set to benefit from the easing of mobility restrictions and/or the development of a vaccine include engineering and contractors, as well as the travel sector. In terms of positioning portfolios for the period ahead, it is also important to be cognisant of the structural winners, such as gold and staples, and to reassess risk limits and exposures to these areas of the market.