CATCH THE RECOVERY WAVE

In an unpredictable year that will go down in the history books, Covid-19 and its tumultuous impact on stock-markets took most investors by surprise.

- JESSICA AMIR

And equities ended 2020 almost at the same level as they were at the beginning of the year. But 2021 marks a fresh start, and it should be a strong year for the stock market and economy, as investors look to a post-pandemic world.

Australia’s economic growth is set to exceed prior gloomy expectations as restrictions ease, borders re-open and vaccines are rolled out. This is at a time when business and consumer confidence is rebounding, interest rates are at a record low and savings rates are at a record high, encouraging spending and borrowing. At the same time, global governments and central banks are stimulating their economies and increasing infrastructure spending (on roads, rail, government buildings, etc), which boosts demand for Aussie commodities (namely iron ore, copper and nickel).

These are all reasons why the market is expected to have a positive year with many investment managers predicting the S&P/ASX 200 to rally 8%-10%. Meanwhile, earnings per share (EPS) growth looks set to rebound 15%. As with any market rallies, there will be leaders and laggards.

There are three key themes to consider when investing in the year ahead.

Cyclicals to shine in a V-shaped bounce

Australians have been breathing a collective sigh of relief as the economy charged out of its first recession in 29 years. The gross domestic product grew by 3.3% in the third quarter, after a 7% plunge in the previous three months. The rebound was also ahead of the 2.6% growth expected. The resounding bounce was led by a huge (8%) jump in household spending as people returned to cafes, restaurants, and leisure activities. It confirmed that the massive fiscal stimulus and interest rate cuts are supporting the economy.