The best description for the financial year of 2020/21 is ‘a tale of two halves.’ The year began with justified despair and fear over the outcomes from Covid-19 and has ended with near euphoria in equity markets. Lately, we have seen significant asset price appreciation and liquidity stemming from record low interest rates, record government welfare payments, vast asset buying, record residential house prices, robust bounce back in construction activity and high confidence levels from consumers as well as businesses.
We witnessed dramatic and widespread earnings downgrades in the first four months of calendar 2020; the world struggled with border closures, supply chain disruptions, hospitalisations, virtualisation of the workforce as most of us started working from home. Dull cash registers at downtown coffee shops were a tip of the iceberg of the low confidence that all consumers and businesses were experiencing.
However once government stimulus measures kicked in and we saw progress with vaccines development, earnings upgrades resumed, and financial markets began to recover sharply. Initially, this was driven by sectors such as consumer, financials, energy, and construction. Following this phase, the economic improvement began to broaden out to technology, resources, industrials, and the broader economy.
Phenomenal change is emerging and presenting some amazing investment opportunities. Many of the exciting and innovative themes and trends changing our world came into the limelight as well, and these will continue to accelerate over the years ahead. In technology, we are seeing software continue to “eat the world” as Marc Andreessen once said, with the internet of things, artificial intelligence, data centres, 5G and subscriber content models driving so much change and productivity.
The sustainability theme is a clear opportunity available in global mid-cap stocks that will likely persist in the future across the energy and resources sectors. Net Zero, decarbonisation, solar, wind and renewables are terms we are hearing everywhere.
Investment portfolios will likely need to stay balanced between long term growth winners and exposure to the strong economic recovery through energy, resources industrials, consumer, financials and technology. Some of the crucial considerations over the next 12 months include pricing power (given rising input costs, inflation, increasingly tight labour markets); sustainability (as credit costs rise and competitive pressures intensify); valuation discipline (given there are either high or record asset prices in many sectors) and duration (what is really driving company growth - is this cyclical or structural).
As we consider both the high debt levels as well as asset prices worldwide, let us not forget that free money will not last forever for consumers, businesses, or governments. Stock picking will likely become more critical and valuation discipline will return across the market. The earnings upgrades and higher confidence of business to invest will likely drive the market higher during financial year 2021/22 despite concerns of inflation and higher interest rates.
