Australian equities are the only developed market region where T. Rowe Price is holding an overweight position as the firm issues a “cautiously optimistic” outlook for the country for 2021.
The firm said Australia had supportive valuations, decent dividend yield while earnings estimates were being revised higher. The ASX 200 had returned 1.9% since the start of the year to 16 December while the Small Ordinaries index had returned 7.8%. Unlike other countries, Australia also benefited from the lifting of lockdown restrictions and extensive fiscal and monetary support.
The US had performed better than Australia with the S&P 500 seeing returns of 7.9% but T. Rowe Price said the US suffered from political volatility, rising COVID-19 cases and US dollar weakness. The FTSE 100 had lost 16% over the same period.
Performance of S&P 500, ASX 200 and FTSE 100 since start of the year to 16 December 2020
Randal Jenneke, head of Australian equities at T. Rowe Price, said: “We are cautiously optimistic towards Australian equities in 2021, the only developed equity market that is favoured as an overweight by our global multi-asset colleagues.
“The Australian share market has supportive valuations, a decent dividend while FY20 earnings estimates have bottomed and are being revised higher. The market is also less at risk from a small number of highly-valued growth stocks, and returns this year have been more evenly distributed across sectors, including consumer discretionary and communication services.”
He particularly highlighted quality growth companies such as medical devices manufacturer Resmed, recruitment group Seek Group and building firm James Hardie, all three of these stocks had seen returns of more than 20% since the start of the year. However, T. Rowe had taken profit on iron ore producers and the materials sector and questioned the sustainability of the rebound in travel stocks.
Performance of three stocks versus ASX 200 since the start of the year to 16 December 2020
Looking at earnings, Jenneke believed strong earnings would take until 2022 rather than 2021 despite the successful development of a COVID-19 vaccine.
“For the market, the real story for earnings is more likely to concern 2022 rather than 2021, when investors will be looking for strong, sustainable earnings per share growth. At the macro level, there are still numerous risks to the earnings outlook for 2021, such as rising non-performing loans at the banks, weaker commodity prices and an assumption of no more lockdowns,” Jenneke said.
