“Blue Wave” – Back on?

February 2021 Monthly CiN-sights

Global equity markets continued their ascent into 2021 as all three major US indices hit new record highs during January (S&P500/ NASDAQ were +16.3% and +43.6% respectively in CY2020), however volatility returned in the final week of the month, with the VIX index recording its largest percentage move ever. Domestically, the ASX200 lifted to within 5% of its February 2020 peak. Enthusiasm on the approval of multiple COVID-19 vaccines in numerous jurisdictions, plus an expectation of additional substantial fiscal stimulus in the US post the Senate election outcome, provided the early impetus.

The US market keenly awaited the outcome of the Senate run-off election, which saw the Democrats and new President Joe Biden secure a razor thin majority, with Vice-President Kamala Harris holding the casting vote. Equity investors interpreted this positively on hopes of further fiscal support and Joe Biden didn’t disappoint, proposing a new $US1.9tril COVID-19 stimulus plan, augmenting December’s $US900bil relief package. Furthermore, markets are anticipating a less confrontational approach to global trade compared to the previous administration and a reduced likelihood of the Democrats more aggressive polices being approved given the Senate composition.

The ASX200 saw a continuation of market rotation and demand for economically sensitive stocks as expectations of Australia’s CY2021 GDP continue to be revised up. The sustained belief of a V-shaped recovery has seen value along with cyclicals outperform. Economists have been progressively lifting their GDP estimates, with many now expecting better than 4% growth from only 3% as recently as November. Interestingly, these forecasts are now much closer to Treasury’s October Budget estimate of 4.75% in FY21/22. The solid recovery in the labour market is a catalyst for improved growth, with December’s 6.6% unemployment rate being the lowest since April 2020 and CY21 estimates are now around 6.5% versus an expected peak of 10%.

ASX earnings season for 2H20 begins in February with some strategists suggesting analyst’s forecasts are still too conservative and upside risk remains for current FY20/21 EPS growth of only circa 8%. Similarly in the US, expectations for 4Q20 earnings are being revised up. With results season already underway, the consensus estimate for the S&P500 is now only -2.5% (vs. previous -10%) and -11% for CY20 from an earlier -21% forecast. Importantly, the forward looking estimate for 1Q21 is currently +19%.

In our March Quarterly outlook we moved to overweight on both the US and AU markets as we expected the earnings outlook to be bolstered by the accommodative policy setting, particularly with a fiscally motivated new US Government. The newly appointed Treasury Secretary Janet Yellen (ex-Federal Reserve Chair) confirmed the need for the US to maintain fiscal support at this time and indicated any tax hikes may not be immediately implemented.

In the EU region however, we remained at a neutral weighting as strict COVID-19 restrictions persist, challenging the growth recovery. As Germany and the UK record daily deaths, their lockdowns have been extended until at least mid-February. France and Holland have imposed night time curfews and travel restrictions remain across the entire zone. ECB President Christine Lagarde has suggested the possibility of a double-dip recession, as weakness in 4Q20 is likely to continue into 1Q21.

Our regional positioning is consistent with the IMF’s latest January World Economic Outlook release. They now expect 2021 global GDP growth of 5.5% from 5.2% in their October outlook. The upgrade is primarily due to increased US growth, now at 5.1% vs. previous 3.1% and Japan at 3.1% vs. 2.4% (IMF advanced economy group). Their AU GDP forecast improves 0.5% to 3.5%. However, the EU zone growth estimate has been cut to 4.2% from 5.2% on continuing 1Q21 weakness amid rising infections and renewed lockdowns.

Overall we remain optimistic that a stimulus friendly, low interest rate environment aids both the economic and earnings recovery. Additionally the increase in global M&A activity, which we highlighted in our November CiN-sights remains supportive of selective risk assets, notwithstanding ongoing COVID-19 challenges and elevated valuations.

For further information and guidance, please contact us here.

Disclaimer

This information is provided by Carnbrea & Co Limited ABN 33 004 739 655, Australian Financial Services Licence No. 233763. Any advice included in this document is general in nature and does not take into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it is appropriate to you. If a product we recommend has a Product Disclosure Statement (PDS) or a Prospectus, you should read it before making a decision. Past performance is not a reliable indicator of future performance. Derivatives are leveraged products which means gains and losses are magnified and you may lose substantially more than your initial investment. We do not endorse any information from research providers that we provide to you, unless we specifically say so.