With rates at rock bottom and inflation low, the stage is set for more strong equities returns in 2021, says Adam Dawes.

Dawes, a senior corporate advisor at Shaw & Partners, caught up with Stockhead recently to discuss the markets outlook.

Broadly, sentiment remains positive as Australia’s economy emerges from the pandemic.

That’s evidenced by the fact that ASX small caps are trading near 12-year highs.

Lithium stocks are back in vogue, while the BNPL train is still going full steam (despite a slight hiccup yesterday).

And trading volumes (and prices) have been surging for a number of different fintech stocks over recent days.

With bullish stock moves across multiple sectors, it can be hard to know where to look at the moment when choosing how to allocate capital.

And for his part, Dawes has been doing just that in the telecommunications space, with recent investments in Aussie Broadband (ASX:ABB) and Spirit Telecom (ASX:ST1).

“I’ve been doing a fair bit of buying in ABB, especially in light of the takeover bid for Vocus (ASX:VOC) from the Macquarie infrastructure group,” Dawes said.

Macquarie last week lobbed a binding bid for the fibre network operator, and VOC shares have climbed by around 25 per cent since the start of February.

“In my view, that midsection of the telco space is going to get smaller and smaller. And you’d be looking to these kinds of businesses like ABB to potentially be targets for consolidation down the line,” Dawes said.

“So ABB we’ve got a ‘buy’ rating on. It’s got a market cap of around $500m and sits in that space really nicely.”

“The Telstras of the world aren’t going to get any growth because Australia only has certain size of population to drive it. But there’s plenty of opportunities for smaller companies with the ability to nip at their heals and take market share.”

Following our interview with Dawes, ABB (which listed in October) released a strong half-year result yesterday that beat prospectus forecasts. (Shares in the company closed ~5 per cent higher).

Within the headline numbers, Dawes said he was more focused on the metrics around ABB’s subscription based revenue model.

“Most importantly for a ‘subs’ business, customer acquisition costs (CACs), churn, net adds and average revenue per user (ARPU) are ahead and remain strong which is a key driver to long-term value,” he said.

Looking at the market more broadly, ASX telcos emerged from the pandemic in pretty good shape, posting an average annual gain of 43 per cent in 2020.

“The other one we have a buy on is ST1. We just raised our price target to 67c, and they’re currently at around 38c,” Dawes said.

“That’s certainly a company in that alternative carrier space — there’s a few in there but it’s getting smaller, and that sort of space is quite interesting for that market consolidation angle.”
 

Macro view

While the post-COVID bull market saw a number of sectors post outsized returns in 2020, Dawes said Shaw & Partners expects the macro environment to broadly underpin stock valuations.

“We’ve got a positive medium term outlook for the economy,” he said.

“I think market’s in the early post-recession recovery phase of the cycle, which implies extended periods of low inflation and low interest rates and that’s favourable for equities over bonds.”

Broadly speaking, he said the pandemic has acted as “a big reset. And potentially that’s our reset for the next 5-7 years.”

“So for me I think that’s a huge positive for what we’re seeing in the market. From that, the market is a forward looking beast, so it’s going to price in a lot of what’s happening in 6-12 months time.”

“And in that time frame I think we’ll see markets continue to gravitate more towards the growth story versus the defensive sides (of the market),” Dawes said.

Assessing the market as a whole, he said the bullishness in tech/growth marks something of a shift for Australian investors, who have long based their valuation methodology around profits and stable dividends.

And on balance, he still thinks big dividend payers (such as the banks) will come back in vogue, but that will be more of a 2022 story once dividends return to previous levels.

In the meantime, Dawes’ sector picks for 2021 are technology, consumer discretionary and industrials.

“I think tech will still play a big part in people’s psyche, in terms of the growth side of things,” he said.

“But there’s no doubt there are some higher valuations in tech and consumer discretionary as a result of that growth, so it’s going to be difficult for some of them to keep moving forward.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.