FNArena’s Weekly Insights – January 18 2021

In today’s Weekly Insights (the first in 2021):

-Share Market Outlook 2021: Swings & Roundabouts
-Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Share Market Outlook 2021: Swings & Roundabouts

The past three months have reminded investors about that one old adage that had been largely forgotten post-GFC:

-global recessions pull cheaply priced value stocks back in focus, after share prices have been savaged first and enough confidence has returned for investors to focus on the economic recovery ahead

The past three weeks have added another layer to that recovery story:

-equity markets in 2021 might well be beholden to whatever bond markets decide lays on the horizon. Too much of a good news story is at this stage feeding into expectations of higher inflation, which translates into rising bond yields, which has kept the ASX200 in Australia inside a sideways moving channel since late November.

In order to create the proper context, investors equally need to appreciate:

-rising bond yields weigh on valuations for structurally growing, long-dated assets which mostly affects Quality and Growth segments among equities, as well as your typical bond proxies (yield stocks like REITs and infrastructure assets)

-rising bond yields re-affirm confidence in the economic turnaround which then coincides with rising energy and commodity prices, a weaker US dollar and strengthening currencies leveraged to the global resources theme (such as the AUD)

-put simply: rising bond yields switch market leadership from Growth & Quality (the previous winners pre-late 2020) to Value and Cyclicals, those stocks that would guaranteed deliver underperformance, or worse, post 2013 until late last year

The past three weeks have also shown the 2021 global recovery story won’t simply be a straightforward continuation of the “take risk and thou shalt be rewarded” meme that dominated markets in 2020.

Initially, rising bond yields provide backup for the global recovery story and thus for the switch in market leadership in equities.After a while, however, rising bond yields put the breaks on rising equities, as has been happening in January.

Were bond yields to continue rising, this will force a re-valuation of assets, and thus trigger a correction in share markets affecting both Quality and Growth, as well as Cyclicals and cheaper Value stocks.

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