The outlook for the Aussie sharemarket in 2021

The Aussie sharemarket experienced significant volatility in 2020. What can we expect in 2021 and which sectors are likely to shine?

There’s no denying that 2020 was an interesting year, thanks to the pandemic, and the Aussie sharemarket certainly felt it. The ASX 200 plunged to 4,402.50 on 23 March after hitting a high of 7197.20 on 20 February. And Australia entered its first recession in almost 30 years.

Despite the volatility, 2020 turned out far better for investors than was feared, said Dr Shane Oliver from AMP Capital. So what is the outlook for the year ahead? Dr Oliver is cautiously optimistic.

“2021 is likely to see a few rough patches along the way (much like we saw in 2010 after the recovery from the GFC), but looking through the inevitable short term noise, the combination of improving global growth and low interest rates augurs well for growth assets generally in 2021,” said Dr Oliver.

“Australian shares are also likely to be relative outperformers returning around 12% helped by better virus control, enabling a stronger recovery in the near term, stronger stimulus, sectors like resources, industrials and financials benefitting from the rebound in growth and as investors continue to drive a search for yield benefitting the sharemarket as dividends are increased.”

Portfolio manager of the Fidelity Australian Equities Fund, Paul Taylor, is also optimistic. While significant uncertainty is likely to continue in the short term and will likely cause some ongoing volatility, we firmly believe that when we look back to this period in five years’ time, we will view it as an excellent time to have invested in the market, he said.

Mr Taylor added that Australia and the world are simultaneously undertaking monetary and fiscal policy expansion, and once we enter a post-COVID-19 recovery phase, it will likely be a positive for Australian and global equity markets alike.

“Even if interest rates initially rise on the back of this expansionary phase, equity markets tend to perform well in the early phases of interest rate rises. That said, interest rate rises are still probably a year or two away, as we navigate the demand destruction resulting from COVID-19 measures,” he said.

The sectors likely to shine

Russell Investments expects to see a rotation towards more cyclical parts of the market that are cheap, at the expense of the more expensive growth parts of the market. “In this scenario, we would expect to see banks and REITs outperform at the expense of more defensive consumer and healthcare stocks which have benefitted from the COVID-19 dynamic through 2020,” said Russell Investments.

The team at InvestSMART thinks mining and energy is a sector that might outperform this year. “Years of underinvestment and high dividend payments by miners have left the supply side looking weak. Miners still look attractive and are better managed than in the past,” InvestSMART’s deputy head of research, Gaurav Sodhi, told Canstar. He offered the examples of South32, Alumina and Woodside Petroleum.

Old world industrials are also worth a look, according to Mr Sodhi. “Everyone is looking for the next hot thing and high quality, steadier businesses are being ignored as investors chase the next Afterpay,” he said, naming United Malt Group, Telstra and Omni Bridgeway as companies that fit that description.

Cover image source: Pavel Ignatov (Shutterstock)