2021 is already shaping up to be quite eventful. Growth has been a permanent fixture over the last few months fuelled by record low-interest rates and government stimulus.
However, with many advanced economies producing favourable growth numbers recently, the prospect of inflation risk resulted in a bloodbath for bond and equity markets last week. This has since stabilised but is this a sign of things to come for 2021?
In this article, in conjunction with our investment team at Innova Asset Management, we will look at the top investment themes to consider over the short term. However keep in mind we always encourage our clients to take a longer-term approach to investing and to not get caught up in all the noise.
Bitcoin & digital currencies
The rise in the price of bitcoin in 2020 was astronomical, at one point in February 2021 it had risen 10-fold from its March lows. But does this make it an investment? Buying bitcoin is straightforward enough, but ‘investing’ in it is a different matter. Our view is that the currency is still volatile. It is not a Government-issued currency and its purpose is to decentralise the ledger. There is always the risk that the Government decides to legislate it out of existence if they became uncomfortable with the lack of ability to track and trace the flow of money.
For our clients, we prefer to stick with investments that have a long track record of low volatility and diversify across a number of asset classes. This is a risk mitigation strategy with the aim of producing consistent, long-term results.
Are we in a bubble?
The broad Australian equity market is above where it was 12 months ago when COVID hit, but just barely. Whilst it isn’t cheap, it isn’t in a bubble.
Some tech stocks look like they’re in bubble territory. Whilst the revenues of Afterpay and Zip keep going up, revenue and profit aren’t the same things, and the assumed future profits that justify their current prices don’t seem plausible under most scenarios.
The US equity market, as defined by the S&P500, looks to be in a bubble, but it is primarily concentrated in growth and technology companies like Tesla, Apple, Amazon, Microsoft etc.
Other equity markets around the world range from fair value to mildly expensive, but not bubble-like valuations.
Government bonds appear to be in a bubble, but some of the air has been let out over the last few weeks via Central Bank intervention (bond buying).
Listed and residential property has seen a strong surge over the last 6 months, however, it is still down from where it was 12 months ago – not cheap, but does not look to be bubbly.
Whilst we believe most asset valuations are above average, we do not believe we are in bubble territory at this time. Rest assured, we continue to discover opportunities of fair value through our due diligence processes to continue providing you with consistent long-term returns.
Hamish Douglass, Chairman, CIO, and Portfolio Manager of Magellan Global also provided some commentary on:
Gambling on stocks
According to Hamish, the recent large-scale entry of retail investors into the stock market poses some stability risks. Examples of this crowd-driven surge in values include the Gamestop rally, which saw the gaming stock surge from $17 to $500 in a matter of days -solely triggered by a group within an online Reddit forum, the lofty valuation of the electric car maker, Telsa and also cryptocurrency bitcoin which is now valued at $US 1trillion. Hamish has admitted that he is really quite frightened about this almost gambling mentality to investment, which has no correlation to investment principles. What matters from here is whether they have become large enough to pose a systemic risk that could cause a market crash.
Inflation
Bond markets seem to be taking the huge government stimulus packages rolling out and the prospects of widespread vaccinations quite seriously now, as the yield (interest rate return) on longer-term bonds have sold off. This is due to rising inflationary fears, as higher inflation makes assets with a fixed rate of payment, like a fixed rate bond, worth less as you can now purchase the same bond with a higher rate of return for the same price. This is likely to continue as the economy transitions through the Covid recovery.
The central bank will be key to managing inflation in the short term and they will be doing all they can to ensure it stays within their pre-determined inflation targets. They do this mainly by purchasing Government Bonds in large quantities (just last week purchasing $4Billion worth). Will this be enough? Only time will tell.
What does this all mean for you? Interest rates are expected to remain low for the short term as stated by the RBA.
