I’m a card-carrying optimist. You likely know that by now.
I’m an optimist because history, and my assessment of human nature, suggest that things will continue to get better.
Not in a straight line.
Sometimes, not even for stretches at a time.
But over any significant length of history – and I expect the same to be true in the future – we’ve found the way to better ourselves and our society.
That doesn’t mean that I expect every part of that future to be beer and skittles. It doesn’t change my long term outlook, but it would be wrong for me to say I don’t see any risk of disappointment or error in 2021.
So let’s go through what could go wrong:
1. The government could bungle the withdrawal of stimulus
You know by now that I’m not afraid to give governments or oppositions a gentle whack when I think they deserve it. I’m apolitical when it comes to my views on various policies and their shortcomings.
But I also give credit, apolitically, where it’s due.
And the Federal Government deserves huge credit for the size, speed and sheer sweeping nature of the economic response to COVID-19. (The Early Access Super Scheme is the notable exception, and is probably the single worst economic policy I’ve seen in over a decade. Maybe longer.)
The stimulus has worked. Very, very well, aided and abetted by the combination of luck, circumstance and good management that have kept our COVID cases to an absolute minimum. But now, with that stimulus set to end on 31 March, the government faces a task that will make or break the entire response: the date and pace at which it withdraws JobKeeper.
If the economic circumstances don’t allow it, but the government proceeds anyway, it risks plunging us back into the very recession it’s spent more than $100 billion of our money on getting us out of in the first place.
I don’t want them to continue spending taxpayers’ money if it’s unnecessary, but I don’t want them to stop out of political or ideological bloody-mindedness if the circumstances don’t permit.
2. House prices and household debt
You know, for a month or two there, it looked like Australian house prices might moderate. And then they resumed what seems like an inexorable rise.
Now, I’m not house price permabear. There are plenty of them out there, but I think they are missing a huge point – supply and demand will do what supply and demand, well… do.
But that doesn’t mean I like house prices being so high, or that I don’t think it presents a risk to the economy.
The RBA cut rates, hard, to shore up the economy. And, like the government, it’s hard to criticise them, based on the economic outcome.
Except that they have again fired up a housing market that was already, to most eyes, red hot.
Now, I’m on record as saying things aren’t as bad as they seem – high ‘ticket prices’ for houses are the wrong focus: it’s affordability that matters.
(Share prices provide an analogy: it’s not the price per share that matters – it can be 10c or $10,000 – but what earnings you’re getting. I’d rather pay $10,000 per share for a company with a price-to-earnings (P/E) ratio of 8 than 10c for one with a P/E of 100, all else being equal!)
So, while those interest rates have pushed up the ‘ticket price’ of housing, affordability remains reasonably close to the average levels of the past three or four decades.
Still… high prices and high debt mean not enough equity in the system, which makes us vulnerable to the next economic shock.
3. Interest rates and government debt
There’s no escaping the fact that by pulling out all the stops, well, there are few, if any, stops left.
The official cash rate has nowhere left to go, but negative.
The federal government has (rightly) taken on generational levels of debt.
I worry that there are no enunciated plans to get rates back to a more normal ‘neutral’ level, any time soon.
I worry that the government isn’t acting more quickly to recoup and repay the debt that’s been incurred.
Because there’s not much ammo left, for next time (and I really don’t want to pass that government debt on to our kids).
4. An unwelcome economic ‘echo’
“What goes up must come down”, they say.
That’s one of nature’s laws that doesn’t necessarily apply in economics.
But that doesn’t mean it can’t, or won’t.
Economies tend to get larger, over time. So do company profits and share market indices.
And for good reason.
But when things get too far ahead of themselves, we can get falls… just as, after March and April, when things got too pessimistic, we see meaningful recoveries.
(I did warn you to buy – or at least keep holding – during March and April, even as other Chicken Littles headed for the metaphorical hills.)
I’m writing this a day after both JB Hi-Fi Limited (ASX: JBH) and Super Retail Group Ltd (ASX: SUL) (owners of Super Cheap Auto, Rebel and BCF) announced sales were up more than 20%, year on year, in the back half of 2020.
Frankly, there is so much cash being thrown at retail right now, we should expect that the ‘echo’ of that spending to look a little bit like the birth rate in the immediate wake of the baby boom.
Not only can retail not keep growing at 20% per year, but there’s a real possibility that it might actually shrink in 2021.
Which is no bad thing, necessarily. After all, even if – and it’s not a prediction – JB HiFi’s sales fell 5% in 2021, for every $100 in sales it made in 2019, it’ll still make $114 in 2021!
But we need to know it’s possible. Maybe not even likely… but possible.
If it happens, it’ll be a shock.
The headline writers will have a field day.
And – most crucially – our national psyche will be tested.
If we give in to the fear and uncertainty prompted by that data and those headlines, it’s possible we snap the national purses and wallets shut, tight.
If we do that, it’ll be a self-fulfilling prophecy of negativity, which could, in the worst case, lead to a recession.
All for the want of some longer-term thinking, and a realistic interpretation of our economic circumstances.
5. Something unexpected
How’s that for vague?
And yet, this time last year, how many people were predicting a global recession that would be worse than the GFC.
And, of those, how many were predicting a fast, large bounceback, such that China was again growing at 6.5%, and the world’s stock markets were near (in some cases, above) pre-COVID levels?
Not only that but had I written this piece in 2020, it wouldn’t have mattered what worries I’d highlighted, I certainly wouldn’t have picked COVID as the biggest impact on the market (and if I had, I wouldn’t have imagined we’d recover most of our losses by year end!)
If you’re of a certain age, you might remember the old business magazine, Business Review Weekly. It used to regularly report on the series of ‘X Factors’ that had impacted the market almost every year, that almost no-one saw coming.
Bottom line: The idea of the ‘unexpected impact’ is not only not new, but is, in fact, very common.
We literally should ‘expect the unexpected’.
So what do we do now?
The first thing we should note is that we can’t know what will happen in 2021, as I implied, above.
So I reckon trying to forecast is a mug’s game.
If we can’t forecast, what should we do?
That is, make sure we’re ready for what the market (and the economy as a whole) might throw at us.
I think we should be prepared for a volatile year in 2021. Both in the economy, as stimulus is withdrawn, and on the market, as investors digest that information, and alter their expectations accordingly.
I think we should expect some retailers to turn in negative sales growth (i.e. ‘sales decline’, as we used to call it before the boffins gave it a new, more digestible label).
I think the economy will continue to recover, underpinning jobs, and likely house prices for the medium term, so I’m not too worried about a banking sector collapse (but it remains a higher risk than most pundits give it credit for). But at prevailing share prices, I can’t be a buyer of the banks.
I think interest rates will rise faster than many expect. I don’t know when, or by how much. And I’m sure as hell not going to try to make money on the back of that speculation. But in the interest of preparing, I think it’s worth being careful of businesses whose current levels of profitability will likely come under pressure as (when? if?) rates rise.
More importantly, I expect the ASX to continue to rise.
I think good companies are in a wonderful position to continue to grow profits, thanks to their own dominance and an economy that continues to recover.
I do also think that some companies remain overpriced. I think there’s too much hype in some of the more popular companies, and too much thoughtless confidence in many ‘old faithfuls’ that are too expensive, as a consequence.
After all of that?
I’m not chasing speculative no-hopers. I’m not plunking my portfolio into sub-par returns from overpriced ‘blue chips’.
I think there are some wonderful opportunities to buy some great businesses at reasonable prices.
You have to be careful to make sure you’re buying quality.
You have to be careful you’re not paying too much.
And I think the greatest danger is that we let the potential risks – which are ever-present in one form or another – stop us investing altogether.
So, I’m going to keep investing, right through 2021, paying scant regard to ephemeral trends and fears… no, not ignoring them, but remembering that they’re almost certainly transitory, if they move from ‘risk’ to ‘reality’ at all.