Aussie stocks may shed laggard tag in 2021

For many investors Down Under, 2020 was a year to forget. Australia's stock market struggled to regain ground during the pandemic, even as many others like the US surged as investors continued their love affair with all things tech.

Next year will likely be a different story, with a vaccine-fuelled global rebound benefiting cyclical shares. Australian stocks are set to shine.

Strategists from AMP Capital Investors Limited and Commsec expect the local benchmark to reach a record high in 2021, while Macquarie Group Limited forecasts double-digit returns amid a recovery in earnings on economic stimulus and rising commodity prices. The S&P/ASX 200 Index is 5.7 per cent below its record reached in February this year.

Traders have already been pricing in the reopening of economies as global deployment of coronavirus vaccines gets underway. The S&P/ASX 200 Index surged 10 per cent in November, its best month ever. And analysts expect buyers to continue to load up Australian shares, about half of which are in economically sensitive sectors including financials and materials.

Underpinning investor confidence is the expected turnaround in corporate profits. Morgan Stanley and Macquarie both see earnings for S&P/ASX 200 Index members rising around 20 per cent next year, which would be the best bottom-line growth since 2016 for the benchmark, according to Bloomberg-compiled data. The gauge rose 1.2 per cent on Thursday.

"Just as 2020 was dominated by the pandemic and this determined the relative performance of investment markets and stocks, 2021 is likely to be dominated by the recovery," said Shane Oliver, the head of investment strategy at AMP Capital. Australian shares are "likely to be relative outperformers."

Here are four things to watch heading into 2021:

Economic rebound

Recently released data is offering scope for an economic revival.

Australia heads into 2021 having exited its first recession since the early 1990s, and with the highest consumer confidence in more than a decade. Scrapping virus restrictions, a stimulatory budget and the central bank's quantitative easing program have brightened the country's prospects.

Airlines and travel-related firms are seen among the biggest winners going forward as consumers look to spend their holidays domestically given an inability to head overseas.

Banks also offer good exposure to the improved outlook, said Paul Xiradis, Chief Investment Officer at Ausbil Investment Management Limited. Lenders are trading "well below their long-term multiples, have experienced less delinquency and bad debts than first thought, and are all well capitalised," he added.

China tensions

Trade tensions between Beijing and Canberra ratcheted up after Australia publicly called for an investigation into the origins of the coronavirus. China responded with steep tariffs on wine and barley and restricted products such as coal, beef and seafood.

Treasury Wine Estates Limited is one of Australia's biggest losers from the rift and among the benchmark's worst performers this year after China imposed anti-dumping duties. Still, while the spat is negative for some sectors, "we don't think it disrupts the growth recovery story in Australia," said Hamish Tadgell, a portfolio manager at SG Hiscock & Co. "If it started to impact things like iron ore that would change the view."

2020 winners and losers

Technology and materials, the top-performing sectors this year, may have capacity to extend gains next year.

Tech shares skyrocketed 61 per cent in 2020 as traders flocked to high-growth companies. Digital payment platform Afterpay Limited is set to be the best performer on the benchmark this year, surging 311 per cent after it expanded into new markets and cashed in on a global change in spending habits.

The sector's rally moderated after vaccine developments prompted a rotation into some of the pandemic's most beaten-down sectors. Still, growth stocks that focus on trends like digitalisation should remain attractive, said Michelle Lopez, head of Australian equities at Aberdeen Standard Investments Limited.

Miners also soared after a bumper year for materials like copper and iron ore. Demand across commodities will likely outweigh supply as economic growth picks up, said UBS Group AG analysts, who are overweight on the sector. The energy sector was Australia's biggest laggard amid weak prices and a shift to clean power sources. However, a recovering global economy might support crude, said Andrew McAuley, Chief Investment Officer at Credit Suisse Private Bank in Australia, who's been increasing his exposure to Australian oil stocks.

Dividends

Investors dealt with steep dividend cuts in 2020 as companies preserved cash amid the health crisis. Next year, those payments should start to come back as corporate profits perk up.

"The dividends will start to go up again as we go through 2021, as banks and others say 'well, things haven't been as bad as we thought'," said AMP's Oliver. Banks, widely held by retail investors for their usually reliable dividends, may have scope to provide fatter payments after Australia's prudential regulator lifted its cap on payouts. (Bloomberg)