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With the ASX tipped to outperform in 2021, shares in this sector could rocket

a man raise his arms to the sun as it rises with the year 2021 in the background, indicating a bright future on the ASX share market
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Global share markets are entering the final days of 2020 in a tug of war between the same 2 prevailing forces that have dominated share prices since February.

COVID-19, now responsible for more than 1.7 million deaths around the globe, continues to roil investors.

Shares largely surged on the back of multiple successful vaccine approvals in recent weeks. But the new, more transmissible variant of the virus coming out of the United Kingdom is raising fresh uncertainties.

Manufacturers are broadly expressing confidence that their vaccines should prove effective against the new mutation. But it will be several weeks before clinical trials can confirm that.

On the other side of this tug of war, pulling share prices higher, are the world’s leading central banks and governments.

Company earnings, debt positions and management teams often took a back seat in 2020 when it came to share price moves.

Instead, it was unprecedented monetary stimulus (zero bound interest rates and quantitative easing (QE)) from the central banks and trillions of dollars of fiscal stimulus packages from first world governments that pulled global share markets out of their February and March nosedive.

Indeed, US share markets have repeatedly set new record highs over the past weeks. In fact, the 0.5% gain posted by the Nasdaq Composite (NASDAQ: .IXIC) yesterday (overnight Aussie time) set a fresh all-time high for the tech-heavy index.

And the All Ordinaries Index (ASX: XAO) – after plunging 37% during the market crash – is back in positive territory for the year, up 1.4%. Though the All Ords is still 4.8% below its own all-time highs set on 20 February.

The master of uncertainty

On the subject of stimulus, the US$900 billion (AU$1.2 billion) coronavirus relief package that finally made it through the US House and Senate faces a final hurdle from outgoing President Donald Trump.

As if investors needed any more uncertainty to cap off 2020, Trump indicated he might not sign the package without certain amendments. That announcement has seen US futures dip lower.

Which brings us to…

Are share prices overvalued or undervalued?

Are share prices overvalued, undervalued, or fairly valued as we head into 2021?

That’s a question that analysts and investors the world over are trying to wrap their heads around.

Joanne Feeney, a partner at Advisors Capital Management, leans to the bearish side, at least short term. Speaking on Bloomberg TV, Feeney said:

So much of the good news of the vaccine had been already digested and even the stimulus bill that people had largely anticipated. So some of the flattening of the market just reflects how much has already been built into the market from those two good sources of news.

And US President-elect Joe Biden’s warning that the “darkest days” of the pandemic are still to come is unlikely to stir investors’ animal spirits. Though again, as grave as that reality is, those darkest days for the US, Europe and other hard-hit regions of the world should brighten considerably as the vaccine rollout picks up pace in the first months of 2021.

In more soothing news for share markets, Biden is already pressuring Congress to craft the next big stimulus package for early next year once he has the keys to the White House.

Taking a more bullish stance on what some analysts are flagging as overvalued share prices is Brad McMillan, chief investment officer at Commonwealth Financial Network.

As quoted by the Australian Financial Review, McMillan says:

In fact, 2020 earnings are still on the recovery path from the pandemic. If we look at 2022 (earnings per share) expectations, we see much greater appreciation potential. With ongoing economic recovery and the possibility of one or more vaccines, that valuation seems very achievable.

So, with a year-end multiple of 20 on forward earnings (which is at the lower end of recent valuations), a potential target for the S&P 500 is 3900—or about 10 per cent above current levels.

McMillan is talking about the US market here. But as we know, the US share market performance has a major influence on the rest of the world’s markets, including the ASX.

The good news here is that numerous analysts – including Shane Oliver, head of investment strategy and economics and chief economist at AMP Capital – are predicting an outperformance for ASX shares compared to the rest of the world over the next 6 to 12 months.

Some of that is based on Australia’s exceptional handling of the virus (to date).

But it’s the predominance of resource shares trading on the ASX that could really set the index – and select shares – up for a strong performance in 2021.

According to Ausbil Investment Management portfolio manager Luke Smith (quoted by the AFR):

We think we’re entering the early stages of a multi-year bull cycle for resources and the backdrop is extremely positive.

China’s economy is clearly very strong at the moment and when you combine that with the rest of the world, which is going to benefit from unprecedented stimulus, the backdrop is looking extremely compelling.

ASX resource shares leading the charge

Though past performance is no guarantee of future performance, the top gaining share on the S&P/ASX 200 Index (ASX: XJO) over the past month is Fortescue Metals Group Limited (ASX: FMG).

Despite slipping a touch today, Fortescue’s share price is up 33% since 23 November. And this is a company with a $72 billion market cap we’re talking about here. The past month’s surge brings Fortescue’s share price gains in 2020 up to an eye-popping 117%.

And it’s not just Fortescue. Four of the top 10 performers on the ASX 200 over the past month are resource shares.

OZ Minerals Limited‘s (ASX: OZL) share price has gained 23% in the past month, the fourth best performer on the ASX 200. That’s seen the copper and gold miner’s share price leap 77% year-to-date.

If we really are in the early stages of a multi-year resources bull cycle, as Ausbil’s Luke Smith predicts, there could be far more gains ahead for well-positioned ASX resource shares.

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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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