After the chaos of 2020, what’s ahead for equity markets this year?

SINGAPORE: The year 2020 was an extraordinary one for equities. After hitting extreme highs and extreme lows, the last month of the year saw new highs on Wall Street. 

US stocks ended 2020 with a bang, with both the Dow Jones Industrial Average and the S&P 500 both closing at record highs and the Nasdaq gaining 43 per cent in the course of the year.

Fiscal and monetary support, coupled with vaccine optimism to tackle COVID-19, have propped up investor hopes.

Experts say the positive trajectory for equities will likely hold in 2021.

Mr Andrew Harmstone is head of global balanced risk control strategy at Morgan Stanley Investment Management.

He said the outlook is good for equities relative to fixed income. He also said it is likely that central banks will maintain a loosening policy, which should facilitate growth and help equity markets.

Strong business investment and solid government policies will be key drivers for equities.

Most market watchers believe that the arrival of a new administration in the United States bodes well for policy stability.

In Europe, the uncertainty over Brexit appears closer to resolution.

And China has also clearly articulated its policy priorities over the next five years.

Mr Harmstone said such geopolitical conditions mean businesses will start re-investing, providing a strong cyclical element to future growth.

Cyclical stocks that rise in demand during economic upticks stand to benefit.

The growing focus on green energy could also pave the way for higher infrastructure spending.

The ongoing vaccine roll-out in various parts of the world could also kick-start consumer spending.

“With the relief of a vaccine, it's going to almost be like party time," said Mr Gary Dugan, CEO of investment firm The Global CIO Office.

"So conspicuous consumption, whether it's cars, people moving houses, going on holiday. All of these things will see a huge amount of spending just through pure relief and also pent-up demand,” he added.

Still, the Global CIO Office expects 2021 to be a tale of two halves – with the illusion of strong recovery in the first half and a reality check towards year-end, as governments face growing deficits.

READ: Unable to resist a bargain, more Singaporeans turn to stock market amid COVID-19

BETTER OUTLOOK FOR ASIAN EQUITIES

Market watchers said that investors should maintain caution over going overweight on US and European stocks, and that Asian equities could have a better payoff.

“Don't get carried away with the rally we've seen in markets. A lot of people now think that we're back into markets where we're going to see consistently 10 per cent plus returns in equities. Don't bank on it unless you are taking risk by investing in emerging markets or certain parts of Asia, which I would encourage people to do,” said Mr Dugan.

Technology stocks that have outperformed in 2020 could continue to see a strong performance.

But with many facing regulatory scrutiny in Europe and the US, smaller thematic tech plays in the artificial intelligence space may be better options, experts said.

READ: Commentary - Investing in markets? Why future gains lie in tech stocks

In Singapore, equities could see better days after being among the region’s worst performers in 2020.

“We expect Singapore to outperform its Asian peers and cover up some of this disappointment that we had in 2020. In terms of recovery, we’re expecting earnings growth of about 30 per cent for the STI index, that's our top down estimate for 2021," said Mr Shekhar Jaiswal, head of equity research at RHB Bank Singapore .

"In terms of valuation, where STI is trading right now it's pretty close to its historical average since January 2008. We think that valuation is reasonable. So our 2021-end STI target is 3,144, about 11 per cent upside from current levels.”

Singapore’s retail sales and private consumption are set to benefit from further easing of COVID-19 restrictions.

Market watchers said this means there is potential for investors to get into these sectors early, and start taking positions so that they can benefit from domestic recovery.

RHB Bank Singapore recommends a barbell strategy where domestic consumption plays such as F&B and land transport are balanced off with high-yielding growth stocks.

The bank’s consumption recovery picks include China Aviation Oil, ComfortDelGro, Dairy Farm International Holdings, Suntec REIT and Thai Beverage. Meanwhile, its cyclical recovery picks include CapitaLand, CDL Hospitality Trusts, City Developments Ltd, DBS and Singtel.

For vaccine-dependent sectors such as aviation, real estate, hospitality, entertainment and healthcare, earnings recovery could pick up by year-end.

For now, investors should also keep tabs on risks coming from the US-China trade war, corporate structuring among Singaporean firms and potential consolidation in the real estate investment trust or REITs space.