ASX 200: Could Australian stocks see double digit gains in 2021?
We look at why one investment bank believes Australian stocks could rise further over the coming year.
ASX 200: A year in review
The ASX 200 benchmark has faced significant uncertainty in 2020 – with the pandemic driving unprecedented levels of volatility.
A calm before the storm
In February the index crept to an all-time high – rising above the 7,100 point level. Investors appeared resoundingly optimistic, and though the first cases of the virus emerged in November (2019), the market, whether unjustifiable or not, didn’t view it as a problem at the time.
Things turned ugly quickly though: By March (2020) global COVID-19 case counts were spiralling out of control. While Australia, during that peak and in general; has not been as impacted as many other countries – lockdown measures, travel bans and a variety of other preventive measures were enforced in reaction to the spread of COVID-19.
Unsurprisingly, equity and currency markets were thrown into turmoil – less in reaction to what was happening in Australia and more into what was happening on a global scale. Employment figures were crashing, GDPs contracting, and people panicking as the global economy ground to a halt. As if to highlight all of this chaos: Oil prices even went negative in late April, if only for a brief movement.
Locally, the ASX 200 would bottom out on March 23 – hitting an intraday low of 4,402 points. The benchmark looks as if it won’t trade any lower than that in 2020, rising steadily following the March meltdown.
The Australian dollar didn’t fare much better than the blue-chip benchmark, either, it plunged to 55 cents in March as investors feared the worst for Australia’s economy.
Hindsight has ultimately made those ‘world is falling’ concerns look overblown: Equities have surged and the AUD/USD last traded above the 75 cent handle. Iron ore prices also fell, but generally remained elevated and last traded at multi-year highs.
The return of bullish sentiment
At Monday’s closing price, the ASX 200 has rebounded more than 50% from its March low. Despite that rally, overall, the index has traded broadly flat in 2020, underperforming a number of global indices in the process. The Nasdaq 100, for example, is up 39% YTD.
While true that the Australian index has remained flat YTD – with iron ore trading at multi-year highs, the Australian dollar up, interest rates low and an effective vaccine ‘on the way’, investors’ confidence has decisively returned.
But what does this mean for stocks in 2021?
Below we look at one investment bank’s view for the coming year – including how much they think Australian equities can rise, the earnings outlook for Australian companies, how the Australian dollar may perform and why the rotation away from growth and into value will continue.
Double digits, so long as…
Overall, Macquarie Wealth Management expects Australian equities to trend higher in 2021, as long as the multiple vaccines currently in varying stages of being rolled-out, work as intended, that is.
On this front, the investment bank said that:
‘So long as vaccines work as claimed, we are looking forward to reflation in 2021,’ with the investment bank arguing that 'ASX stocks could rise over 10% in 2021, supported by an improving cycle.’
Earnings to lift
With many companies taking a significant earnings hit in 2020, Macquarie believes we are set to see a sharp rebound in corporate earnings across 2021, arguing that the current forward consensus suggests earnings per share (EPS) may rise around 10% over the next 12-months.
‘Coming off a low base, supported by fiscal and monetary stimulus, with vaccines set to unleash a wave of spending as people draw on their savings, and with strong commodity prices, we could see an earnings lift of 20% again in CY21.’
Companies that have been most impacted by COVID-19 may also witness the most pronounced benefits in the coming year, with it being noted that:
‘Covid losers, particularly those exposed to travel and leisure services could see some of the largest upgrades.’
Value in vogue
Adding more colour to what areas of the stock market may outperform in 2021, the investment bank argues that the rotation from growth to value is set to continue in 2020. The current climate, argues the broker, is the perfect setup for value outperformance, saying:
‘We think the odds still favour value, as it tends to outperform in expansions and slowdowns.’
ASX-listed financials, in particular bank stocks, have rallied strongly over the last 3-months: ANZ has risen 32%, CBA has gained 27%, NAB has surged 36%, and WBC has moved up 18%.
AUD/USD buoyed by iron ore
Finally, as a result of the investment bank’s bullish view on commodities, Macquarie’s analysts continue to see upside for the Australian dollar from current price levels, postulating that their models suggests the AUD/USD should currently be trading higher than it is.
Specifically, it was noted that we ‘remain positive on the Australian dollar, with our model based on commodity prices and the AU-US interest rate differential saying the AUD should already be $0.79.’
That price target implies potential upside of around 5% from current levels.
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