After record breaking ASX share price rallies, what next in 2021?

2020 has set a series of new records for ASX 200 share price moves – first lower, then higher. What will 2021 deliver?

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Bag of money sitting on top of wooden blocks spelling out 2021

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We kick off the first Monday of the last month of 2020 with a spot of good news.

Today, at time of writing, the S&P/ASX 200 Index (ASX: XJO) is up 1.1%.

Yes, that’s nice. But that’s not the good news.

The good news is that this morning’s strong start puts the ASX 200 in the green for 2020. It’s currently up 0.3% since the opening bell rang on 2 January.

Now that may not last the day. The last time the average share price of Australia’s top 200 listed companies closed up for the year was on 26 February.

That was just 3 trading days into the horror selloff that saw the ASX 200 crash 36.5% from its 20 February all-time high to its 23 March 2020 low.

It’s now up more than 47% from that low. And less than 7% off the all-time 20 February highs.

Both the size and the speed of the market’s fall and rebound smashed any previous records.

And it’s not just the ASX. Most global share markets have experienced similar record-breaking moves. And some, like US share markets, are trading back at record levels.

On Friday, the Dow Jones Industrial Average (INDEXDJX: .DJI), the S&P 500 Index (INDEXSP: .INX), and the Nasdaq Composite (INDEXNASDAQ: .IXIC) all closed at new all-time highs. The gains came with hopes the long-awaited, near trillion dollar US stimulus package will soon get the green light.

The Nasdaq has posted a truly stellar year. The tech-heavy index is up 37% since 2 January and up 82% from its 23 March low.

That’s been 2020 for you.

But with the clock ticking on the old year, what can investors expect from share markets in 2021?

Proceed with caution

The forecasts among leading analysts and fund managers ranges from cautious to cautiously optimistic.

Bank of America Corp (NYSE: BAC) falls on the cautious side of that equation. The Bank of America’s Bull & Bear Indicator has leapt from 4.7 to 5.8, on a scale of 0–10.

As the Australian Financial Review (AFR) reports, the bank is concerned about investors’ acceleration “toward extreme bullishness” giving it a “code red” designation.

According to Bank of America, the US$115 billion (A$155 billion) invested into stocks over the past 4 weeks set a new record. Meanwhile, the US$9 billion outflow from gold, a classic haven asset, over the past 3 weeks sets another new record.

Adding to the bank’s cautious outlook, it stated fund managers’ cash holdings had dropped to 4.1%, approaching what it views as a “sell signal”.

So what should investors do in the months ahead? According to Bank of America (quoted by AFR):

If risk asset correction occurs [in the] next 3-6 weeks, investors should buy the dip in cyclical value; if [a] correction [takes place] in 3-6 months, investors should buy defensive growth.

Buying opportunities ahead

US and Australian share markets have rallied strongly following the pandemic-led selloff despite a wave of share offerings to raise capital.

As Bloomberg reports, data compiled by Informa Financial Intelligence’s EPFR unit show companies announced plans to raise some US$510 billion via initial and secondary share offerings in 2020.

That’s up 50% from 2019 and it’s equal to the amount companies plan to remove with share buybacks and takeovers this year. By comparison, over the past 10 years companies have bought back an average 3 times more than they’ve issued.

Buybacks, as you’re likely aware, tend to drive up share prices while share offerings tend to be dilutive.

Winston Chua, an analyst with EPFR, explains the rationale behind the surge in share offerings (quoted by Bloomberg):

Obviously when the market is at an all-time high, you want to issue shares now, because the shares are worth a lot more than they would be if the market was tanking. Looking at the market broadly, companies are not being supportive of share prices.

While all the share offerings may not be supportive of share prices today, Mike Bailey, director of research at FBB Capital Partners, points out this looks likely to change in 2021 (quoted by Bloomberg):

There’s a lack of an incremental buyer out there, so that’s a negative, and it still signals some caution as companies let the cash accumulate. The flip side is, you are building more pressure for companies to really drop the hammer and start to buy back stock next year and into 2022.

Brian Rauscher, Fundstrat Global’s head of global portfolio strategy, also sees buying opportunities ahead, recommending a move from value shares over growth (quoted by the AFR):

Any dips in the broad equity market that may occur in the coming weeks based on worsening COVID cases and short-term weak economic data should be viewed as buying opportunities.

2021 is just a few weeks away. And while there will be plenty of risks in the share markets in the year ahead, there will also be plenty of opportunities to make money.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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