New All-Time Highs for Aussie Stocks in 2021?

With the media having declared Joe Biden ‘President-Elect’, China are clearly loving the way a Democrat-controlled US are going about their business.

It’s certainly emboldened the communist dictatorship to increase their rhetoric against Australia.

Yesterday, China handed over a list of 14 grievances to the media, in a targeted attempt to pressure Australia to change its tune. The Sydney Morning Herald reports:

The list of grievances also includes: government funding for “anti-China” research at the Australian Strategic Policy Institute, raids on Chinese journalists and academic visa cancellations, “spearheading a crusade” in multilateral forums on China’s affairs in Taiwan, Hong Kong and Xinjiang, calling for an independent investigation into the origins of COVID-19, banning Huawei from the 5G network in 2018, and blocking 10 Chinese foreign investment deals across infrastructure, agriculture and animal husbandry sectors.

In a targeted threat to Australia’s foreign policy position, the Chinese official said if Australia backed away from policies on the list, it “would be conducive to a better atmosphere”.

It used to be that China tried to exert influence via covert methods. Now they’re just coming straight out and telling us what we need to do to avoid more pain via trade sanctions.

Of course, we could cripple their economy rather quickly with a ban on iron ore imports. But that would cripple our economy too, so that’s not going to happen.

The aggressive tone of the communication gives you a good indication of how China will treat Australia with Donald Trump (supposedly) out of the White House.

While Australia has to tread carefully, it certainty can’t give in to China’s threats.

China is kidding itself. Here is an authoritarian government demanding to be treated according to the rules of a liberal democracy, while adhering to none of those rules itself. It would be comical if it weren’t so serious.

But it doesn’t seem to bother the market. And as an investor, it shouldn’t bother you either. The market has made a bullish move out of a six-month trading range over the past few weeks. China tensions be damned.

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While I would expect to see a correction play out in the weeks to come, the market looks like it’s heading back to its highs from earlier in the year…

Port Phillip Publishing

Source: Optuma

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Near-perfect outlook for the stock market

The correction may have started overnight. Wall Street sold off late, with the Dow off by more than 1%. Aussie stocks are likely to be in the red today.

But I would see this as a buying opportunity, especially if the selling gathers pace.

Clearly, all the stimulus thrown at the economy over the past six months is working its way through the economy and the market.

There is evidence of that in Bluescope Steel’s earnings upgrade this morning. From the ASX release:

Managing Director and CEO Mark Vassella said, “All operating segments are performing well and momentum has continued to build as we approach the end of 1H FY2021. Residential alterations and additions activity, demand for detached new housing, and growth in demand for e-commerce warehouse and logistics facilities are all robust and US automotive industry demand is recovering strongly.”

“Demand strength, particularly in the Australian market, has continued to outpace our expectations. We now expect that Australian construction and manufacturing activity will remain strong, driving elevated domestic steel despatches for the balance of 1H FY2021.”

But we know stimulus only has short-term impact on the economy. The bond market is telling you that by refusing to sell-off. 10-year Aussie government bond yields are trading around 0.9%. That’s hardly a sign of strong growth.

I know the RBA, now firmly in the QE camp, is buying bonds, and some would argue keeping yields artificially low.

There is an argument for that.

But I would also say that if inflationary pressures were genuinely building, bond rates would be much higher, even with the RBA’s regular buying.

That’s just not happening though. The bond market is looking through the short-term boost and seeing an economy with more debt to carry. That’s deflationary.

It’s also a near-perfect outlook for the stock market. Non-inflation/deflation in the real economy means inflation in financial assets. As long as the economy keeps its head above water and company earnings hold up, financial assets will rise through the magic of low interest rates.

Keep in mind the Aussie market is coming out of one of the sharpest (and shortest) bear markets in history. Stocks were very cheap at the lows. Broadly, stocks are still cheap now.

Which is why, despite the fact that China are on our case, and despite the fact that the economy is now heavily reliant on government support, I think our share market goes higher in 2021.

Yes, there will be lots of volatility on the way. But I’m tipping new all-time highs for Aussie stocks next year.


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Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

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