Entering the year, both the USA and China were recuperating from the ongoing trade war. Both presidents were beating their chests claiming victory but it is fair to say they were both licking their wounds. It wasnt a great way to start what was going to be an extraordinary year.
The shocks started in late February/early March and kept coming and coming. The pandemic struck with full force and knocked the markets hard. The health induced recessions came at a pace as businesses were forced into closing around the world. People were locked up at home, lost their jobs and sadly many lost their lives. Heath professionals became the most powerful force in the world and claimed most deaths in the name of coronavirus.
As people lost their jobs, large banks predicted that property was going to fall by 20-30%. Earnings forecasts were retracted and forecasts were slashed by analysts. By end March the stock markets had fallen 37% – in less than 1 month.
For a while the whole world went crazy. In fact, there are people talking about their favourite epidemiologists!
In the panic, shares were sold indiscriminately and were priced as if earnings would be down forever. By the end of March, the behavioural panic destabilising markets began to reverse its course as some risk tolerant investors gained confidence. Online investor numbers grew fast. Lots of new investors people were “punting” from their couches at home.
Stocks began their recovery as riskier investments were made on the basis that earnings would only be reduced for a year (or two) and a solution would be found to the virus.
Stimulus began and continued the world over which brought much needed liquidity to economies as the central banks printing presses fired up. The effects of stimulus were very powerful especially for China. Whilst people doubted China’s strength, we now see that the global stimulus has made its way to Chinese exports. Now there is little doubt that China is strong – exports up 21% in November from 12 months ago. Indeed the factory of the world is going very well.
The Trump era is almost done and a period of some rationality can begin. But what about trade war? The phase 1 agreements for China to buy from the US has not been possible due to the pandemic. Depending on how Biden pursues the deal this is likely to be a sticking point. Will it cause the next phase of the war? How will Biden’s negotiations be different?
Australia has become stymied in its own trade war. China has aired its 14 grievances which began the trade war but mainly points the blame at our political leadership’s blind adherence to its commitments to the US. The US weaken nations through bombs. China’s modus operandi is to “economically weaken” its prey. We are in China’s crosshairs. We are being threatened with embargos against so many goods now that the benefits of being in the region are being slowly eroded. At the same time immigration has stopped due to the pandemic. We need to be careful.
Is recovery priced in?
In June 2020 we mathematically forecast the ASX200 index reaching 6800 by Xmas to Feb 2021. When we surveyed where people believed the market would be by February 2021, on LinkedIn, the responses were unsurprising. 67% thought the ASX200 would be less than 6000 (which was about the level of the survey). 27% believed it would reach 6000 but less than 6500. Only 6% thought the market would reach 6500-7000 points. The market is now about 6700 – which underlines the power that maths can bring to stock markets.
We are still forecasting the market to reach these levels between Christmas and February.
For now it is still better than cash in the bank
During the year investors had anticipated strong earnings growth – based on assumptions of a recovery. A ramp up in actual earnings growth and forecast growth is beginning. Whilst they are off a lower base, the momentum is with earnings recovery as we see revenue growth begin to contribute to profitability.
This V-shape recovery has been facilitated by the ongoing fiscal stimulus. We are close to a position where earnings forecasts now approximate the prices being paid in the market. Not for all stocks but many.
A lot now hinges on employment as the government support packages like JobKeeper continue to unwind. Trade with China and migration have been significant to the development of Australia’s strength in the past decade. Our biggest challenge now is how do we make the next leg of growth in employment and growth with both of those major drivers out of our reach.
Should you continue to invest in shares? What other alternative do you have – money in the bank is going backwards. When we are close to the February levels in the market the easy money is pretty much done, and we are back to careful timing and stock picking. Pythagoras excels in this environment too.
We are releasing a new product in 2021 which has even greater predictive power. Stay tuned.