Smile like you mean it

“Life isn’t about waiting for the storm to pass. It’s about learning how to dance in the rain.” – Vivian Greene

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What a year 2020 was. It was the worst global pandemic since the Spanish flu 102 years ago and will no doubt make up an interesting chapter in the history books many years from now!

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For many it was a year they would like to forget. So, when I tell people I actually quite enjoyed 2020, it is not without a sense of guilt knowing it was not as kind to many others as it was to me.

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2020 was the year we founded Emanuel Whybourne. 2020 will forever go down in my mind as one of the best years of my life.

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Not only did I have the excitement of co-founding this business, but I also had the experience of what It was like to work from home. To not have to wear a suit and tie every day. To not sit in traffic every morning. To spend more time with my wife and kids. COVID-19 afforded me a much better lifestyle and work-life balance. Hopefully, many others will say the same.

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After seeing that this way of life is possible, I do not think we will ever return completely to how it was, virus or no virus. Developments this year influenced the investment environment and drove disruptive technology to remarkable heights. Some portfolios with disruptive technology investments were up over 100% for the year!

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For some investments 2020 was one of the best years of returns we have seen since the recovery following the Global Financial Crisis. We had a sky falling sell off, followed by a recovery of record speed in less than three months. I for one am proud to say we successfully navigated these waters for our clients against a backdrop of many funds and investment managers struggling to record positive numbers for the year.

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We could not do our jobs without being optimistic. The fact is, with markets now hovering around all-time highs again (and continuing to make new highs), if you were optimistic about the future of markets on almost any time measure you would have made money. I do not expect this to change any time soon. I am unashamedly an eternal optimist.

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I recently read an interesting insight from the team at Ophir Asset Management which stated that “The S&P500 spends lot of time at all time highs, in fact the S&P500 has been within 5% of all time highs nearly half the time over the past 70 years.” Their analysis showed when looking at all-time highs historically, the range of returns 12 months afterward compared to ‘off an all time high by more than 5%’, the range of returns is actually remarkably similar (8.2% near an all time low v 7.4% off an all-time high)… it is a lot easier to be optimistic than it is pessimistic! (Source: LinkedIn Post by Ophir AM, January 2021).

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Being an optimist does not mean I will only find good out of everything I read, nor does it mean I don’t think the market can go down. I simply have a strong belief when making investment decisions, they must be done with a long-term lens. We should not worry about short term fluctuations in prices as often as people sometimes do. Whatever is happening in prices today will not usually change the investment case for why we are invested in the first place (of course there are exceptions).

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Being our first note for the year, I thought it would be helpful to detail our outlook for 2021 and why we believe that yet again, 2021 will be a good year for our clients. For those of you who have watched this market rally from the sideline and hold concerns you have missed the boat, I would urge you to take action. Investing is a long-term game. If you are waiting for the next drop or trying to time your entry perfectly, chances are, you might fail.

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In my view, the best time to invest is always today!

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COVID-19 Update

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In initial trials both the Pfizer and Moderna vaccines appear to be about 95% effective which is much better than the seasonal flu vaccine which is between 40-50% effective (Source: Macquarie 2021 Global Outlook). These vaccines are being rolled out as we speak. With the combination of vaccinations and ongoing social distancing, we think it is likely the spread of virus should start to slow. We expect to see COVID-19 headwinds dissipate in the first half of this year, which should see global GDP grow by about 5.5% in line with a V-shape recovery (Source: Macquarie Asset Management Outlook 2021).

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I am not a doctor. Nor do I pretend to be an authority on the virus. However, I do know that the human race is an incredibly resilient species and vaccination or not, a solution will be found. We will, at the very least, find a new normal which will result in the return of business activity.

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Outlook for Australian Equities

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Australian GDP is expected to grow by about 4% in 2021 (source: Macquarie 2021 Global Outlook). Consumer confidence is high and housing prices appear to be holding up, which is all positive for Australian equities. Continuing from last year it looks like we are seeing a lot of M&A activity. This is just an observation I have made from the volume of private equity transactions we have been approached for and read about regularly in AFR’s street talk.

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Australia, as the rest of the world, is continuing to undertake a lot of fiscal expansion. As a result of the COVID-19 outbreak, according to Paul Taylor from Fidelity (source: Fidelity Outlook 2021) this will likely be an incredible expansionary period for global growth and positive for both domestic and international equities. Fidelity claim even if interest rates rise on the back of this expansion, equity markets could still continue to perform well in the early stages of interest rate rises (predicted to be possibly a year or two away).

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Retail spending has been remarkably strong and continuing to accelerate (Source: www.abs.com.au/statsitics/industry/retail -and-wholesale-trade/retail-trade-Australia-latest-release) driven by both stimulus and redeployment from other avenues like international travel.

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However, in our assessment, over the past 10 years the Australian market valuation metrics have followed global markets methodology, by changing from an earnings-based justification to a multiple expansion model due to falling interest rates. I personally believe much of the capital appreciation in the Australian equity market over the past few years has been due to TINA (There-Is-No-Alternative).

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I think it is somewhat of a concern that the price of companies like Qantas and Webjet are back to their pre COVID-19 Enterprise Value levels (source Schroders Australian Equity Research) when we are likely to continue to have issues travelling for, at the very least next few years. If interest rates do rise (which is possible), with companies beginning to be valued on earnings once again, I do not see how these valuations could hold up.

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Like Warren Buffet famously said “it is only when the tide goes out you discover who’s been swimming naked!”

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Outlook for Global Equities

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The next few months will be challenging for those countries experiencing high levels of COVID-19 infections. However, with vaccines now being distributed, markets have shown they are happy to look through the current environment and focus on the light at the end of the tunnel. Macquarie expects the US economy to growth by 4.75% over the year whilst the Euro zone should increase 6% year on year. This is a great backdrop for equities.

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Cathy Wood from Ark Invest in her latest presentation to investors, predicted we could see earnings recovery to $200 per share (from $140 in 2020). This would almost certainly justify the current bull market.

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Cathy thinks we may actually see long term interest rates rise in the near/ medium term and this may put pressure on the Fed to raise rates sooner than expected. This could, in the near term, cause markets to sell off. However, there are also a number of forces moving against this. Cathy argues that the broadening out of this current bull market is a good sustainable sign and that credit spreads are tightening means the bond market is not predicting any trouble moving forward (Ark Invest January Market Update).

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Our view is that 2021 will be another volatile year for equities.

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You simply do not see periods where managers are returning 100%+ without consolidation following.

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Although we believe we will again see a major risk off event during 2021, we do believe we could well see markets end the year materially higher than they are today. However, this comes with an important disclaimer. We warn clients in being over exposed to index products or active mangers hiding behind an index. If we do see inflation bite in, we could see a re-valuation of many companies which comprise a large part of the main indices. Our view is that this is a stock pickers market. We believe exposure to innovation and disruption will be key.

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What could derail this economy?

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There are probably 7 major risks to the current recovery, none of which I consider highly probable, but certainly possible. Those are;

1. A tech war between the US & China
2. A sudden stop in fiscal support globally
3. Some geopolitical risk or regression in global trade agreements
4. A faster than expected rise in interest rates (this is the most likely risk)
5. A failure to contain this virus, with further mutations
6. Fiscal policy tightens too quickly
7. Finally, a black Swan!

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These risks of potential causes of the next market sell-off are no different to many other lists of risks I have compiled in the past. Regardless of where we are in the cycle, there are always going to be risks, both for the upside and for the downside. If I were to assign probabilities to each of those 7 factors above, my money would be on financial markets (equities) being the best place to park funds.

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Even should one of these factors come to fruition, these are renowned as short term “shocks”. They may shock an economy to the downside, a solution is found and then life resumes. The sky does not fall!

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Many clients often say I sound like a broken record (my mother used to say the same thing in response to monotonous tunes sung by my siblings and I on long road trips). However, I do believe the best time to invest is always going to be today. We are seeing a record number of opportunities walk in our doors which I am very excited to share.

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I have not been able to say this at any other point in my career: I do believe the next 10 years will be formative in creating the next generation of wealth, as the world goes through – probably, in my view – a faster rate of change than it has experienced since the Industrial Revolution.

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Regards,

Tim Whybourne and Craig Emanuel

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