Whatever your feelings on 2020, it was certainly an exciting year for ASX share investors.
The speed of the market crash and subsequent rapid rebound is something we'll likely be sharing with our grandchildren. And something we hope not to see repeated.
As a quick recap, from 20 February through to 23 March the S&P/ASX 200 Index (ASX: XJO) plummeted 37%. Since that low, it's come roaring back, up 47%. That's largely been driven by unprecedented government stimulus spending alongside near zero interest rates and massive quantitative easing (QE) packages from the world's top central banks.
Investors who were swept up in the wider COVID-driven market panic and sold after the ASX 200 was already tanking are likely nursing some hefty losses heading into the new year. Especially if they spent too much time on the sidelines before joining in the remarkable share price gains that followed the 23 March lows.
Of course, there are those few investors who sold their ASX shares in the days before the crash. And an even smaller group who bought back in during the early days of the market rebound. Hats off to them, though in truth that type of fortuitous market timing is largely, if not all, luck.
Long-term investors also deserve a tip of the hat. It wasn't easy watching your shares tumble for four straight weeks. But history demonstrates that holding onto the right shares for the long haul has proven to deliver gains to patient investors.
Now the ASX 200 is only up a slender 0.2% year to date. But many forecasts see Aussie shares outperforming their global peers in 2021. This could, in theory, mean new all-time highs for the ASX 200 are just around the bend.
With that said, let's endeavour to take a peek around that bend.
Risks for ASX share prices
The predominant risk often expressed by analysts and fund managers is rising interest rates. Few believe that governments will scale back the extraordinary levels of fiscal support unleashed in the wake of the pandemic. But not everyone is convinced that inflation won't make an untimely reappearance.
Let's face it, we're treading in unknown territory here, with tens of trillions of dollars unleashed across the globe to keep economies afloat. If inflation does begin to tick higher than desired, say above the 3% rate, central banks will have little choice but to raise rates to keep it in check.
Andrew Law, the CEO of hedge fund Caxton Associates, is among those concerned that investors haven't paid enough heed to the 'great reflation'. According to Law (as quoted by the Australian Financial Review):
The stage may well be set for a great reflation.
Many of the expressions [of this reflation] have been out of favour for the best part of a decade. Most market participants, and consequently their portfolios, are heavily conditioned from decades of disinflation or low inflation.
The change in the inflation regime, and subsequently the investor mindset, will likely have profound implications for asset allocations.
Valentijn van Nieuwenhuijzen, the CIO at NN Investment Partners, isn't overly concerned with inflation in the medium term. But he warns that if it does arise, there will be serious consequences for share prices:
I don't think central banks will have to look through inflation, because I don't think there will be any. If I'm wrong and it does accelerate, that's a meaningful game-changer for markets.
It would mean that a lot of losers in markets that have been left behind could really catch up — think of banks and financials, but also the broader value factor that has suffered secular underperformance over the past decade.
Growth stocks would suffer from rising interest rates. They might still rise but less than value. And obviously government bonds would suffer.
The potential for rising interest rates isn't the only uncertainty we take with us into 2021.
I thought the US elections were over!
If you thought the mayhem unleashed by the United States elections in November was done and dusted, you've forgotten about the US state of Georgia.
The state is holding two runoff races on 5 January, as no Senate candidates received the needed majority the first time around. The outcome will determine whether President-elect Joe Biden's Democrats can take control of the Senate, giving him the support of both Houses.
If the Republicans lose the Senate, the outcome will likely drag on fossil fuel shares while lifting shares involved in renewable energy. Democrats are also eager to raise the US corporate tax rate, which was cut under Donald Trump.
According to Bloomberg, options and volatility futures are indicating increased investor angst over the potential for market turbulence due to the election.
Addressing the election, Phil Camporeale, managing director of multi-asset solutions for JPMorgan Asset Management, said:
There's no doubt, if you go from red to blue, you've got to price in something that looks less favorable because of markets liking gridlock, markets liking status quo.
And Cowen analyst Chris Krueger wrote in a note that, "It is impossible to overstate how important these elections are for the size, scale, and speed of 2021 fiscal, tax, and regulatory policy."
Despite that uncertainty…
Markets may hate uncertainty, but you certainly wouldn't gather that from the US share market performance yesterday (overnight Aussie time). All three major US benchmarks closed for new all-time highs…again!
The gains were supported by news that Trump had signed off on a US$2.3 trillion (AU$3.0 trillion) coronavirus and government funding package. Trump approved the deal despite his demand that the US$600 in direct stimulus payments be increased to US$2,000. Congress is set to vote on his demands this week.
However, whether US residents receive US$600 or US$2,000, Dennis DeBusschere, head of portfolio strategy at Evercore Inc, is bullish on the outlook for the US economy in 2021. In a note to clients, he wrote (from Bloomberg):
The new law is large enough to make a significant difference for individuals. Ignore the noise about the "disappointing" checks and focus on the setup for a robust economic recovery in 2021, particularly in the services sector.
If 2020 has taught us anything, it's that no one can predict what the next 12 months will bring.
But if the global economy can continue its recovery as the virus is brought under control, and if inflation remains muted, the outlook for ASX shares appears bright.
