Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Envy of the world – 2021’s top performers winning further from home
Australia, ‘the envy of the world,’ emerged from the pandemic relatively unscathed while the rest of the world was brought to its knees. It’s times like this, that our ‘lucky country’ status (albeit, a status coined sarcastically by author Donald Horne in 1964) really rings true.
Of course, it’s not just luck, thanks to the work of so many, the virus was contained, and the economy kept humming. So much so, that we’ve ‘V-shaped’ our way back into an economy envied by the whole world.
Australia is now stronger than it was pre-COVID. GDP is higher than ever before, house prices are back at ridiculous levels, employment numbers are strong, retail sales figures recovering, and confidence is back. The government’s stimulus measures have well and truly paid off.
The one-year return for the S&P/ASX 200 Index in 2020-21 was 23.7%, well and truly beating the 1.2% gain the previous year (in fact, it was the strongest financial-year performance from the benchmark since it was introduced in 2000).
But it wasn’t the same old names doing the heavy lifting, so what was the major theme for this financial year?
Offshore earners
Looking at the performance numbers for the financial year, there doesn’t seem to be a strong over-riding theme that explains such stellar numbers; the vaccine-led rally had an impact no doubt, but beyond that little else is obvious. Rather, it was a collection of smaller dynamic themes that have constantly evolved and shaped markets.
End to Covid-19 + lockdowns + stimulus + vaccine – While 2020 was heavily influenced by the onset of Covid-19, the first quarter of 2021 brought about a steady flow of positive vaccine news. This marked a significant change in market dynamics. Investors switched from Covid-19 winners to losers. The widespread availability of vaccines brought about the prospect of herd immunity and a return to normality. Value stocks started to do well.
Australia has been well ahead of the curve, enjoying a massive 3.5 percentage-point bounce in nominal GDP. The highest on record. This has slowed to 1.8% this quarter which is expected. As the economy slows down to normal levels, economic activity is 0.8 percentage points above December quarter 2019 pre-pandemic levels and has grown 1.1% in through-the-year terms.
The global economy, however, is yet to experience this rapid boost in activity. Some economists are tipping the re-opening of the global economy will deliver economic growth of at least 4 per cent-6 per cent. In other words, this recovery is going to be huge. But it will also be quite quick.
And that’s exactly what we are seeing. A rotation into cyclical miners, financial companies, energy and industrial stocks. And a subsequent offloading of tech, e-commerce, buy now, pay later (BNPL), food and other consumer staples and utilities. Instead of the usual suspects i.e., Afterpay (ASX:APT), Kogan (ASX:KGN) or Redbubble (ASX:RBL), we saw Chalice Mining (ASX:CHN) +645%, Pilbara Minerals (ASX:PLS) +480% and Lynas Rare Earths (ASX:LYC) +195% top the list. Breaking it down further, a subsector would be battery technology. HUB24 also did extremely well rising some 206% on the prospect of higher interest rates and greater adoption of their platform.
Looking at the table of star performers, almost all the cyclical miners were battery technology-focused, exporting raw materials (lithium, rare earths, nickel, graphite) on a global scale. Mining services companies that serviced these miners also did well.
Yet once you look beyond the hottest smaller-cap names and the speculative mining theme a more powerful theme emerges. The major commonality between the top performing larger, more ‘blue-chip’ companies was simple, they have all expanded successfully offshore. The likes of Reece, Fletcher Building and even Sims Metal have benefited significantly from a shortage of supply and boom in the US housing and construction sector. Extending this further, Virgin Money is a UK challenger bank, benefitting from the swift vaccine rollout, while Pointsbet is having great success expanding its online gambling product across the US.
Going back to the original question, what was the major theme for this financial year? It was offshore earners that have positioned themselves to take advantage of:
- The rapid global recovery created by the end of the pandemic
- President Biden’s US$2.2 trillion ($2.9 trillion) spend to “fight climate change”
- Rotation out of Covid-winners (growth) into Covid-losers (value)
