There’s no doubt 2020 was full of surprises and challenges as COVID-19 reared its head – quickly escalating, forcing severe lockdowns and prompting massive government stimulus measures globally. We know markets and economies took a massive hit in 2020, but what will the new year bring?
In a recent report released by global investment experts, Russell Investments, they share their market outlook findings, watchpoints and things to consider as we leap into 2021.
What’s in store for Australia?
For Australia, Russell Investments reported that we’re coming out of a short but very sharp recession and are in the beginning of the recovery phase.
Our recovery is underway with Gross Domestic Product (GDP) in Q3 reported slightly above expectations as household consumption continues to rebound following the lockdown. And, this is expected to continue in 2021.
The main risk, however, is around household debt, but as the RBA holds interest rates at a historic low of 0.1%, this shouldn’t impact our recovery too much.
Also, with a vaccine being rolled out and a possible reassumption of international travel in late 2021, Australia’s economy is poised to benefit through our tourism and education industries, which both make up close to 15 per cent of our exports.
“While markets have priced in a fair amount of the good news on the vaccine, more gains seem possible in 2021 as corporate profits rebound and central banks remain on hold,” said Andrew Pease, global head of investment strategy at Russell Investments.
In terms of the policy, the Australian Government is focused on maintaining its deficit spending until the unemployment rate is below six per cent, which is unlikely to occur in 2021. While the RBA is expected to keep the cash rate at 0.1 per cent and is likely to increase purchasing long-term government bonds. This is hoped to keep the Australian Government bond yields closer to the US, and as a result, take some upward pressure off the Australian dollar.
Key watchpoints for markets
In their report, they highlight several things to watch out for and expect to happen in 2021:
- Australian equities should outperform Australian bonds
- For the equity market, a rotation towards those more cyclical parts of the market that are cheap is expected
- Banks and Real Estate Investment Trusts (REITs) are predicted to outperform at the expense of more defensive consumer and healthcare stocks, which have benefitted from COVID-19
- The Australian Prudential Regulation Authority’s (APRA) easing of dividend restrictions for the banks should provide additional tailwinds for investors over the next 12 months
- We’re likely to see a search for yield given the RBA (plus other central banks) keeping interest rates close to zero and maintaining various forms of quantitative easing
Also, our diplomatic relationship with China is another watchpoint as we go into the new year. We know it has clearly deteriorated, and this has led to several Australian exports (eg. wine, barley) facing increased tariffs and duties.
Even though the relationship is strained, Russell Investments says, “it’s unlikely to escalate to goods that will significantly impact the outlook for our economy.”
They are however closely watching any decision by the Australian Government to threaten a duty on iron ore exports, as this would offset the damage caused by China’s current tariffs in place.
You may also be interested in our article: How to use the holiday to get on track for 2021?
Due to promising COVID-19 vaccine developments, overall, there is a moderately positive market outlook for the year ahead. There are also expectations that things should return to normal by the second half of 2021.
This is welcoming news as we leave the year behind and focus on our financial recovery and planning for 2021 and beyond.
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