Expert view: What will be the best asset class to hold in 2021?
As 2021 arrives, Stockhead has reached out to its pool of contributing experts for their view on what they hope 2021 will bring. Today’s question is: What will be the best asset class to hold in 2021?
I can’t help but think the attraction of scalable high-growth businesses will continue but the dichotomy between value and growth will narrow – in light of non-existent interest rates there will be some gyration back to value stocks and dividend streams.
Equities. It’s the consensus opinion but I agree we will continue to see the cyclical recovery through 2021 and central banks have committed to not putting the handbrake of higher interest rates on the economy or asset prices.
It feels very TINA (“there is no alternative”) because artificially low bond yields and cash become impossible to own if we see inflation start to tick up.
Equites and Property. Low rates/yields.
Bond yields will remain suppressed for the duration of 2021 with a continuation of major reserve bank stimulus. This liquidity will push into equity markets as investors go in search of better returns. Thus, dividend-paying (and growing) companies will appear particularly attractively valued in the ongoing low-rate environment.
The wall of worries from inflation may maintain the strength in the gold price seen over the past 12 months.
Renewable Energy Infrastructure is an established asset class in a few markets, with leaders in the unlisted subsector being Australia and Canada, while the listed space is led by the UK and US (yieldcos).
With OECD bond yields at six decade lows, global investors are seeking alternative asset classes, and we expect this sector to see huge volume expansion as investors chase government backed, long dated infrastructure as an alternative to almost zero-yield government bonds, and as a play on implementation of net zero emissions pledges by China, Japan, South Korea and now likely US.
Although arguably pricey, we still see significant upside in equities based on global economic recovery above expectations. Although ‘physical’ manifestations of recovery may be 2H21, markets are forward looking and will continue to react to early data. NZ may be a template (albeit small) in terms of economic rebound but add lessening of trade tensions under a new Presidency in the US… although Brexit fallout may still be a sea-anchor.
Physical commodities will also likely be in demand, especially precious metals on manufacturing demand and safe harbour, particularly with bonds hovering around negative yields.
Watch for the progress of digital assets as an emerging investment class in 2021, in particular the development of digital exchanges both offshore and in Australia.
I believe gold will outperform during 2021, based on growing debt levels, higher deficits, more stimulus spending, ultra-low interest rates and a weak US dollar.
Emerging Markets and value over growth. EM because it’s the best levered to the reflation trade. China is back and that drags the space up with them. Plenty of money flow into the space.
Value vs growth is getting the best flows on record. Once it actually starts to turn that will see an exacerbation of the trade.
Our outlook for 2021 is quite positive for equities and especially Aussie equities. We think a combination of record low interest rates and increased government spending to support an economic recovery will see stocks perform generally well next year.
We are a little bit cautious in the short term as markets have run recently so expect some pullback early in 2021, but investors who own a portfolio of growth and value cyclicals should continue to outperform.
Diversified Resources: Leverage to recovery in base metals, strong Fe ore earnings.
We still see Equities as the best asset class in 2021, with Property in No 2. Global interest rates will remain low (near 0), as global central banks continue to print money at unprecedented rates.
Stimulus will be a major theme in Q1, as Europe and USA do “whatever it takes” to get their economy back on track following COVID. This will send equities higher.
Silver. It is viewed as both an industrial and safe haven metal, so I think it should do well if there is a rebound or further problems.
Gold equities are a leveraged exposure to gold, but I would add to that most of the senior producers have become yield stocks by providing a regular dividend. So there are opportunities within the space for investors to adjust to the level of risk they are happy with whilst still having strong exposure to the metal underlying performance.
Fundamental for gold is strong – the US Federal Reserve began tightening rates in mid 2019 in response to weakening US economic growth. Then we have the coronavirus, which has had a tremendous economic impact countered by an unprecedented deployment of monetary and fiscal stimulus.
The outlook for central banks owning their own government bonds as an emergency funding measure just got a whole lot longer, and with that the political will for interest rates increasing. This creates a platform that gold has always performed well under – low to negative rates.
As and when there is a tick up in inflation – which is easy to imagine as stimulus is deployed, expect gold to experience strong buying.
Throughout 2020, there was evidence that “generalist” buyers were entering the gold market – this applied both to gold equities but also broader uptake of gold ownership. This is a characteristic of a gold bull market that produces strong gains – gold becomes of main stream interest (in bear markets, it’s more for the tragics).
End of 2020 has seen a softening in the gold price which has led to contemplation – was that it? The fundamentals have not changed.
It’s worth remembering that the rough size of the pullback we have experienced in gold since August/September is smaller than the 4-5 pullbacks in the gold market between 2000-2011 which was the last gold bull market. So if we see gold perform again then we will rationalise this as just a pause.
There is a strong growth appetite evident in the gold mining space, which to me is a good reason to choose the equities over the metal.
Since mid 2020 we have seen the announcement of two mergers to produce new top 10 gold producers. These are sensible deals, premised on value that will attract fresh investor interest as a result of their new company sizes, so expect to see rewards in the form of fresh share price premia as they cement their place in the global top 10.
This motivation will trickle down through the whole sector. We have seen the equity market gain a sudden interest right down to explorers, unlocking the value of a litany of projects that had been dormant or going slowly for lack of funding.
The sector is now in full swing. It will drill, discover, build and with that share prices will perform as investors warm to the sector.
These stages of a cycle feature strong capital growth and with a tailwind of gold fundamentals it makes 2021 look extremely exciting for gold equities.
And if you can’t find a gold stock you want to own, what about a listed repo agency?
I believe equities will be the best asset class to hold in 2021, especially with interest rates remaining at zero until at least 2023.
With the trend of retail investing increasing in popularity, as well as the expectation that the world will return to some form of normality next year, equities will definitely be an attractive option for budding investors.
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.