Optimism about the global economic recovery will continue to drive stock markets higher in 2021. The timeline for the delivery of vaccines is becoming increasingly clear. On Dec 11, the US Food and Drug Administration (FDA) cleared Pfizer-BioNTech’s vaccine for emergency use in the US. This was promptly followed by approval from the Centers for Disease Control and Prevention, which officially kick-started shipments to distribution centres nationwide and the rollout of inoculations for people over the age of 16. The vaccine from Moderna will be ready for use hot on the heels of Pfizer’s, as the second vaccine to receive FDA approval late last week.
Also last week, Singapore became the first Asian country to approve the Pfizer vaccine. It expects to receive its first shipment before end-2020. The country has pre-purchased several of the most promising vaccine candidates and if all goes to plan, will have sufficient doses for its entire population available by the third quarter of 2021. To top it all off, Singapore will also be opening a business travel bubble for all countries from January, and host the World Economic Forum’s annual gathering next year.
As we have discussed in detail in our previous piece, the race to immunise the world’s population is on. No doubt, we will see an increasing number of countries authorising the use of more vaccine candidates over the coming weeks and months — starting with major developed countries, which have been the most aggressive in locking up a variety of vaccine purchases early, and gradually expanding to the rest of the world.
Vaccination and immunisation will pave the way for a robust economic recovery, especially in the second half of 2021. Indeed, global gross domestic product growth next year could be the strongest we have seen in decades, if only due to the steep contraction in 2020. That is maths.
Importantly, it will be a synchronised global economic recovery, as vaccination rollouts translate to the normalisation of activities across countries. This is the opposite of the supply and demand shock contractions when the Covid-19 pandemic hit the world.
Growth will be driven by a strong rebound in the services sector, which has thus far lagged the recovery in manufacturing. We expect robust pent-up demand once mobility restrictions are effectively removed, supported by excess consumer savings in 2020.
Consumption — and investments — will be underpinned by a wall of liquidity. The surge in money supply, especially in major developed economies, including the US, is massive — owing to historical low interest rates coupled with fiscal stimulus and deficit spending of unprecedented scale. We foresee this will lead to a secular decline in the US dollar. (See “Start of a multi-year downtrend for the US dollar?” published on Aug 10.)
Central banks will keep interest rates pinned near zero to help economies recover. But as we have written before, there are practical limits to rates falling further from hereon. In effect, this also caps further bond price appreciation and, therefore, capital gains.
Without real yields and with prospects for capital gains shrinking, investors must start switching out of bonds, particularly as risk appetite rises with the global economic rebound.
All of the above will strengthen the global rally for stocks — where cyclicals will do better than high-yields — and commodities in 2021. Commodities, mostly traded in US dollar, will enjoy an additional boost from an expected weakness in the greenback.
Emerging markets (EM) are likely to outperform. For starters, most EMs are still lagging the US market rally this year. In fact, many have seen net foreign fund outflows from their stock markets. This will reverse in a “risk on” environment, with returns boosted by the likelihood of stronger currencies against the US dollar. Another attraction will be higher growth rates, compared with that in developed nations.
Yes, we get it — stocks are trading at historically high valuations by almost all traditional yardsticks such as price-to-earnings, market cap-to-GDP, price-to-sales, price-tobook and enterprise value-to-sales. And yet, almost every analyst, asset manager and retail investor, including us, is expecting the markets to go higher. Are we all wrong?
We do not think so. For starters, investing is about relatives, not absolutes. And with bond returns limited from hereon, stocks are the TINA (There Is No Alternative) trade.
Additionally, the future looks nothing like the past. Consumer behaviours have been irrevocably changed by the pandemic; so have businesses and business models. How then can past parameters be used to predict what will be fair value in the future, when we are living in an environment of so many “unprecedenteds”? When the ingredients are outside of the historical limits, the outcomes must logically also be outside the historical limits!
One key parameter that could surprise is inflation. The odds are that consumer prices will jump on the back of strong pentup demand next year. The real question is whether we will see sustained price increases beyond this.
Central bankers in the largest economies have fought deflation for more than a decade and despite their best efforts and the massive increase in money supply, inflation has consistently fallen short of targets.
Now that almost everyone is convinced that inflation is dead, it may just spring a surprise. Not imminently, but it is definitely something we will be keeping a close eye on, going into 2022.
We suspect central banks will under-react to any initial uptick in inflationary pressures. A case in point: The US Federal Reserve has stated that it will tolerate inflation exceeding its 2% target for a sustained period. This could lead to a larger shock down the road when it has to play catch-up, by raising interest rates faster, and thereby compounding inflationary expectations. While that is a worry for the future, make no mistake, we are investing in a highly elevated risk environment where a small change in interest rate or risk perception will turn the capital markets upside down.
For 2021, the outlook for stocks is bullish on the back of growth in both demand and supply as countries move from pandemic containment to mitigation and recovery modes.
The Global Portfolio traded marginally higher for the week ended Dec 17, lifting total returns by 0.2% to 44.4% since inception. The portfolio is outperforming the MSCI World Net Return index, which is up 33.3% over the same period.
We disposed of all of our shares in Alibaba Group Holding, netting a return of 48.3%, primarily on concerns that a tighter regulatory environment — including for its fintech associate, Ant Group — will hamper growth and hurt earnings, at least in the near-medium term. We also pared our stake in Adobe. The stock has done well and is now up 64.7% from our cost.
We invested all the above proceeds in Chinese carmaker Geely Automobile Holdings, US cloud identity management solution provider Okta and The Walt Disney Co.
Disney is a business that we have always liked very much. Admittedly, we missed the opportunity to buy the stock earlier as its shares rebounded from pandemic-driven lows and rallied to all-time highs. Still, we do not think it is too late to invest in the company. Disney will benefit from the return to normalisation — we expect to see strong pent-up demand for its hard-hit theme parks, resorts and cruises as well as studio (theatrical movie) businesses.
Disney’s streaming business has done exceedingly well since its launch a little over a year ago in November 2019. As at Dec 2, its direct-to-consumer segment had signed up 137 million subscribers, with 86.8 million from Disney+, far exceeding its original forecast of 12 million subscribers for the first year and near the high end of the 60 million to 90 million range predicted for end-2024. That target has now been lifted to 230 million to 260 million subscribers, and up to 350 million including Hulu and ESPN+.
This target will take it past the current projections for Netflix’s total subscribers by 2024. For perspective, Netflix had 195 million subscribers globally at end-September 2020 and a market capitalisation of US$231 billion ($308.2 billion).
Disney’s market cap currently stands at US$307 billion, which makes it a comparative bargain, after taking into account all of its other businesses in parks, resorts and cruise ships, merchandising as well as studios.
Critically, Disney has an excellent track record in creating content. A case in point: The Disney studio has been an increasingly dominant force in Hollywood, delivering a record-breaking US$11.1 billion in global box office in 2019. As we have always maintained, content is king.
The market accorded a higher valuation to Netflix on account of its being a tech company. Well, we are now seeing a perception shift for Disney, as a fast-growing internet company.
It has the quality and breadth of content plus the delivery channel to take on best-inclass, market leader Netflix. Its proprietary library catalogue for both TV and movie intellectual property is vast, including extremely popular franchises Disney (animation and live action), Marvel, Star Wars and Pixar as well as those acquired from 21st Century Fox — important brand name recognition that will no doubt aid its international market expansion. The company has just unveiled a long list of original content slated for Disney+ over the next few years.
The hypocrisy of analysts
Approvals for Covid-19 vaccines are coming fast and furious as countries race to roll out immunisation programmes that will get economies back on track. Growing optimism about normalisation and recovery of the global economy is, in turn, driving stock markets higher.
Glove maker stocks, however, are suffering the opposite effect. Last week, we saw a fresh round of selloffs that sent prices tumbling across the sector. It should surprise no one.
What is even less surprising is the response from the analyst community. This chart tracks analyst recommendations for Top Glove, the largest listed glove maker in the world.
Clearly, the glove story is over — the number of “buys” is falling and “sells” are emerging. Price targets that were being raised to catch up with rising share prices during the pandemic are now being cut after share prices started to drop. Truly, narratives, analyses and valuations follow stock prices, not the other way around!
We have all read how analysts jumped on the bandwagon, justifying higher and higher stock prices based on supernormal profits that everyone must know cannot be sustainable. So why do it?
Is it because analysts, by and large, follow the herd — either due to poor personal judgement and capabilities, or a weak character, and hence do not want to go against the consensus?
Or are recommendations driven by the economics of the business, where their pay is dependent on generating sales and trades?
Perhaps, since the performance of fund managers is measured on a quarterly basis, the best strategy is to buy stocks on the uptrend and sell on the downtrend. The objective is simply to track the broader market performance. In other words, most fund managers cannot afford to be Warren Buffett. And analysts, acting to pacify fund managers who are their main customers, play along.
Can you think of other reasons?
The top gainers for the week were Rio Tinto (+4.8%), Microsoft (+3.5%) and Vertex Pharmaceuticals (+3.4%). On the other hand, Qualcomm (-4%), Ericsson (-3.2%) and Johnson & Johnson (-2.2%) were among the notable losers.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
