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.
There is no alternative – equities to remain in favour in 2021
“There is no alternative” – Margaret Thatcher
This saying, shortened to TINA, has been among the most popular coming out of the investment industry over the last 12 months. Despite limited signs of the benefits of loose monetary policy, central banks doubled down in response to the pandemic, anchoring interest rates close to or below zero in some cases.
TINA refers to the fact that in this environment, investors both professional and self-directed, have no option but to take on additional risk in the pursuit of returns. The alternative is seeing your capital dwindle away in the face of negative interest rates when adjusted for inflation.
Recent discussions have centred around the fact that 2021 may well be the most difficult time for a person to retire and move to generating a passive income, more difficult than at any point in history. Both the Dow Jones and Nasdaq sharemarket indices are at or near all-time highs, whilst the ASX 200 less than 100 points off its own. From a high-level perspective, this makes the decision to move from cash to sharemarkets a difficult one. On the other hand, with cash rates near all-time lows and long-term term deposits offering less than 1% in many cases, it is difficult to warrant locking in capital and guaranteeing such a return.
So where would you invest a dollar today? Despite the headlines suggesting the backdrop for equity markets has never been better, both geopolitical and economic threats persist. The concern this month is the potential for Chinese aggression against Taiwan, the threat of inflation on the back of President Biden’s incredible stimulus package and most importantly, movements in bond rates that are driving day to day movements in markets. In this environment, I remain of the view that growth and diversification should be prioritised; this is not the naïve diversification that comes with owning four banks, or three resource companies.
2020 offered a swift reminder that companies and the boards that run them ultimately control the purse strings. Most importantly through, it focused attention on the folly of investing solely for dividends. The first reaction of most companies during 2020 was to cut dividends, stand down staff and do everything they could to protect their precious capital and cash flow. Whilst there are hopes for a quick recovery of lost dividends, they are just that, we expect these companies to take time and use this opportunity to finally reinvest and innovate what are increasingly under pressure business models.
The returns investors are seeing for the 12 months to March will be quite strong, afforded by several factors. It is worth keeping in mind that the reference point for 12 month performance is the 1st of April, around a week after the market ultimately ‘bottomed’ at 4,546. With the benefit of hindsight, the opportunities were clear, yet in the day-to-day activity, seeing markets moving in excess of 5 – 10% in a single session it was anything but. The outperformance delivered by some managers was driven by three key factors, the first being the most important, the decision not to capitulate amid the worst of the volatility and sell down.
The second, was the importance of having a disciplined and consistent approach to making investment recommendations for your portfolio. The core of this process is regularly having review meetings along with a formalised portfolio review process, which allows the time to reflect and adjust. The final is the ability to be objective and make changes that few professional investors let alone self-directed ones were able to amid the chaos.
The big question now of course, is where to from here? According to consensus from the many ‘expert’ commentators we are in for an extended period of booming house prices, equity market rallies and ultimately the best economic and investment conditions seen in decades. This same consensus however was also convinced the world was coming to an end in 2020 with life as we know it set to change. Now is not the time to guess which option is more likely, but rather be prepared for both.
We expect to recommend several significant changes in 2021 as conditions continue to evolve. We are currently undertaking due diligence on a number of new investment opportunities which will be completed in the next few months. We continue to see greater opportunities outside of Australia, in countries, segments and sectors that have positive tailwinds ranging from urbanisation and consumption growth to the decarbonisation of the economy. Despite being a young economy, Australia continues to lack true innovation and hence our preference is to seek ‘value’ or undervalued opportunities in Australia.
Our focus, more than ever, is on cash and putting your cash to work. The saying ‘cash is trash’ is another one synonymous with the era of low interest rates, whilst ultimately tax retirees in the form of lower income at the benefit of those with debt.
General Advice Disclosure: Where Drew’s comments constitute advice, it is general advice only (AFSL383169). They have not considered the readers personal or individual circumstances. Readers should seek professional advice before acting on any comments.
