"It's been a wild ride," said Matt Hopkins.
Matt's the Senior Portfolio Manager of the AMP Capital Income Generator. In case you're wondering, he was commenting on the share market performance over the past year.
Matt was speaking at AMP Capital's Webinar, 'The Hunt for Yield in 2021'. He was joined by Dermot Ryan, Co-Portfolio Manager of the AMP Capital Equity Income Generator.
Below we take a look at some key outtakes from the webinar.
Where is the Aussie economy heading?
AMP Capital revealed an overall bullish outlook for the Australian economy.
"There's a lot of momentum in reopening the economy and a few bottlenecks as well," Matt said. He pointed to PMIs (purchasing managers indexes) as rebounding rapidly in both the United States and Australia.
"The Aussie economic growth has been at the top end of expectations from where we were a year ago," Matt added. Australians have the incredible amount of stimulus – both monetary in terms of low interest rates, and fiscal in terms of the massive new budget – to thank for that. The level of stimulus we're seeing, Matt said, is really only "comparable to wartime".
The 2 biggest risks to Australia's continued economic growth in his view are how the vaccinations work out and inflation.
On the inflation front, Matt cited "a lot of bottlenecks where the demand for labour is higher than the supply… The expectation is that a lot of these bottlenecks will ease over the year. But if they don't and inflation gets unanchored that could potentially cause a problem."
Are growth shares overpriced?
Looking at where investors may get some of the best returns in the year ahead, Matt said we've seen "a lot of earnings momentum into a market that is already quite rich. But we can differentiate that expensiveness".
He said that most of the overpricing is in the growth parts of the market, fuelled by low interest rates. But AMP expects rates will start ticking higher, perhaps sooner than the RBA has indicated. "Certainly, you'd expect interest rates to be higher in a year's time than where they are now," Matt said.
Broadly, AMP Capital believes that will assist value shares over growth shares, helping sectors like banks and materials, and more cyclical areas. They also expect a continuing rotation from pandemic shares, like healthcare and IT, to recovery shares, like resources, industrials, travel shares and financials.
Dermot agreed that "Growth stocks are really coming under pressure now."
He explained that when you try to value tech companies, "It's what the value of the cash flow is over 10 years' time. If interest rates stay low, then maybe that cash flow is worth more… But as interest rates rise, the cost of not getting paid in those 10-year periods goes up."
Dermot added, "Growth has been the big outperformer in the market versus income or value stocks."
Indeed, growth shares have largely outperformed since 2015 until around November last year, when the vaccines came through.
A record year ahead for ASX dividend shares?
AMP Capital is particularly bullish on its outlook for ASX dividend shares.
"If we get a traditional cyclical rebound with inflation and an overheating economy, we think this will be very good for income stocks," Dermot said. "They're cheap relative to history, and at almost their cheapest level against growth stocks for a very long time. A lot of them have good balance sheets but have really just not had the opportunity to grow well in a lacklustre recovery over the last couple of years."
Addressing the high dividend yielding parts of the market, Matt added, "Those valuations are actually lower than they were a couple of years ago. There's a lot of bifurcation in different parts of the market."
Consensus dividend growth forecasts are at 4%. AMP Capital believes the ASX could be shaping up to deliver a record year for dividends.
According to Dermot, "We think this may culminate with next year being a record year for dividends in the market. We're also seeing a lot of franking credits being accumulated." He added that available franking credits are at "highly attractive levels".
Expanding on that, Dermot said, "At the moment in Australia, we're seeing somewhat of a triple boom. The first being resources, the second being housing, and the third being corporate profitability."
All of this has played through into a "very overstimulated market. The RBA has overcommitted to the zero interest rate, and we're also getting a lot of fiscal stimulus coming through.
"This means there's going to be a lot of domestic profits… and that means there's a good chance we're going to see a lot of franking credits coming through into the hands of shareholders over the next year… The current area where we're finding good opportunities is in the mid-cap space."
4 ASX 200 resource shares poised to deliver
Dermot pointed that the big S&P/ASX 200 Index (ASX: XJO) listed iron ore miners are well placed to deliver to shareholders.
"We really like resources because we think that the short-term cash flows are going to start coming through on ungeared balance sheets for the likes of the large iron ore miners," he said.
He listed BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG), Mineral Resources Limited (ASX: MIN) as shares in a strong position.
"We see the potential across all the iron ore miners for buybacks… So we think there's some really big opportunities there," he said.
AMP Capital notes that there are risks around the sustainability for iron ore dividends. Nonetheless the analysts believe the outlook for dividend growth in the sector is as strong as it's been for years.
Dermot also pointed to growth stories around the lithium space:
It's very interesting. You can buy a lot of the assets and mines that were built in the last boom, then almost went bust, and you can basically participate on a cashflow basis… It's the second mouse eats the cheese analogy. The people that originally bought it didn't see the benefits, but now with the latest boom in lithium you can basically buy those assets at less than replacement costs.
