Investment themes for 2021

The latest IPO and tech company might be exciting, but there are more important themes investors should be paying attention to in 2021.

The dire predictions of 2020 that house prices would collapse, credit growth would fall by 8% and unemployment would reach levels not seen since the 1990’s recession don’t appear to have eventuated.

Instead, Roger Montgomery (CEO, Montgomery Investments) says “I expect property prices to rise.  Investors should know that the single most important driver for short and medium term property prices is credit availability”.

Hugh Dive (CEO, Atlas Funds Management) points to the ABS data released recently which showed credit growth in November 2020 was a record $24bn, up 5.7% from October.

Dive expressed that house price growth and credit growth leads him to select the banking sector as an outperformer in 2021.  He adds “banks are well capitalised due to asset sales and dividend restrictions and changes to the credit code in March will reduce the costs of lending”.  These set the scene for banks to report stronger than expected earnings in 2021 from higher operational profits and potentially writing back some of the bad debt provisioning.

Montgomery says investors should look for companies that generate annuity style income as they are likely to be attractive to international pension funds seeking higher returns than fixed interest.  

He adds “While an Australian investor might believe the shares of a company or REIT with a durable income yield of 5% represents fair value, an international pension fund might be content with a 2.5% yield.  Consequently, prices for stable income earners could jump.”

Nathan Bell (Head of Research, Intelligent Investor) is backing the theme around the reopening of the global economy through investments in Sydney Airport and Star Entertainment.  “Both will benefit as vaccine adoption increases, and as their respective revenues and earnings start getting back to normal, so will their dividend payouts” he says.

Warren Buffett once said “do not take yearly results too seriously. Instead, focus on four or five-year averages”.  The best investors are those who can imagine how the world is likely to be in the future, instead of how it is today.

The share market overall has showed great resilience to COVID, but there are some sectors that warrant great caution.

Nathan Bell suggests “taking profits on anything that relies on higher iron ore prices.  Eventually Brazil iron ore producer Vale will start getting production levels back to something more normal following a slowdown from COVID and mine safety issues, which is likely to bring down iron ore prices.”

There are plenty of signs of excessive excitement in the market including Bitcoin and Tesla valuations, Robin Hood and the frenzied activity in IPO’s.  Matt Williams (Portfolio Manager, Airlie Funds Management) highlights “In Australia this exuberance is manifested by the ever increasing number of companies joining the burgeoning buy now pay later sector and other tech focused IPO’s”.

Dive reminds us of the tech bubble of 2000 where Nortel had a market cap of $280bn and was 35% of the Canadian stock market (TSX), and other tech stocks such as Research in Motion (Blackberry) were larger than major banks such as the Royal Bank of Canada.  He says “one of the similarities between 2020 and 2000 is that investors are being told how all of these companies were going to change the world and not to worry about current valuations or risks on the horizon”.  

Dive completes the trip down memory lane saying that Nortel filed for bankruptcy in 2009 and Blackberry’s smartphone market share has dropped from 20% in 2009 to 0.02% today.

The buy now pay later sector is almost expanding weekly and now has a combined market capitalisation of $40bn.  This combined valuation warrants careful examination when compared to the overall forecast loss of $82m for the sector in 2021.

Buy Now Pay Later companies

Company Market Cap $M Expected profit in 2021 $M Dividend Yield
Afterpay 37,643 +26 N/A
FSA Group 135 +16 3%
Humm Group 540 +67 2%
Laybye 242 -16 N/A
Money 3 580 +3 N/A
Openpay 200 -22 N/A
Quick Fee 82 -4 N/A
Splitit 512 -45 N/A
Sezzle 748 -46 N/A
Zip Co 3,103 -60 N/A
       
Total 40,681 Loss of $82m 0.04%

 

The financial markets are currently presenting investors with a two tier market containing both very expensive and some reasonably valued opportunities.  This is a time for caution and well researched investing. 

 

This appeared in the Australian Financial Review on 27th January 2021.