We are always looking forward at Raiz and know that the path to long term wealth creation through investing can be uncertain. It is always helpful to get the opinions of those who spend their days and nights tracking the movements of the markets, aiding our community to better understand how market participants are thinking and feeling about the economy.
That’s why we asked three experts their opinion on the market as we look ahead into 2021. They are Michael Frazis, Portfolio Manager at Frazis Capital Partners, Eleanor Creagh, Australian Strategist at Saxo Capital Markets, and Omkar Joshi, Principal at Opal Capital Management.
Question 1: How have record low interest rates affected where people look to save?
Growth stocks are a huge beneficiary of low interest rates as more of their value lies in the future. With interest rates expected to be low for many years, growth stocks have the runway to keep growing.
Monetary policy is a powerful determinant of asset prices and the extraordinary policy measures deployed in 2020 are no exception. The collapse in interest rates globally fuels a hunt for yield, which can push investors up the risk spectrum searching for returns. The lack of alternatives entices large amounts of capital into equity markets, but also drives interest in assets like Bitcoin and Gold, with the opportunity cost of these assets falling as interest rates fall, and as money is printed by central banks.
Record low interest rates have forced people to invest in some riskier assets which has resulted in significant ongoing asset price inflation. In particular, with cash rates at record low levels (0.10%) and the RBA committing to keep rates here until 2023, this does pose a predicament for savers who rely on interest income from their deposits. While the returns from equity markets can be impressive and tempting, they naturally come with a higher risk profile too.
Question 2: Are tech stocks overvalued?
It depends on your timeframe. We have strong discipline around valuation, but even so, most fast-growing tech stocks are cheap on timeframes longer than 2-3 years.
One of the standouts in markets this year has been the phenomenal returns for technology stocks riding the wave of digitisation. Not only has the pandemic boosted business, but for tech stocks with less debt, higher cash flows and expected future cash flows, low rates justify a richer valuation. However, the key to whether the returns for richly valued tech stocks can be replicated again in 2021 will be what happens to inflation, yields and the shifting regulatory landscape.
In my opinion, tech stocks need to be looked at from an individual stock level rather than a broad sector level to work out if they are cheap or overvalued. Tech stocks in Australia and the US are very different. In the US, tech stocks have performed strongly through the recent pandemic as they have strong cash flows, strong balance sheets and earnings which have proved resilient to the pandemic. On the other hand, Australian tech stocks generally do not possess the same qualities in terms of cash flow generation and balance sheet quality. For this reason, US tech stocks should trade at higher comparable valuations than those here in Australia. Although there are some tech stocks that are very expensive and arguably overvalued, that in itself is not enough to send them crashing down. Mispricing can take a long time to correct itself.
Question 3: Are you optimistic about the equity markets for 2021?
We are in the midst of a recovery, and Governments are continuing to stimulate and provide cash support to businesses and people. This is quite a positive scenario. If Governments start talking about cost-cutting, or central bankers start talking about increasing interest rates, we might think differently.
Yes, but 2021 is set to be a very different year to 2020. On one hand we have a vaccine rollout coupled with the extraordinary and unprecedented global central bank response. On the other hand, COVID related supply bottlenecks, pent up demand and green policy agendas may boost inflation and push longer term interest rates higher. This dynamic has the capacity to shift market leadership toward real economy stocks, non-US markets and commodities. Low inflation underwrites record valuations. If inflation levels change, valuations will likely change with them.
I am cautiously optimistic on the equity markets in 2021 as we recover from the current pandemic. However, a lot of the good news and anticipated recovery has already been priced into the equity market, which is why we are trading at current levels. Although the eventual move might be higher in 2021, I am expecting a lot of volatility along the way, especially at an individual stock level.
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The views of these experts are not necessarily the views of Raiz. Please consider your own financial goals and circumstances when making an investment.
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