Global markets are at the beginning of a multi-year growth cycle. Here’s where the big boys are investing

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Global markets are roaring out of COVID, driven by a credit-fuelled economic growth.

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On Wall Street, the NASDAQ, Dow Jones, and S&P 500 Indexes are up an incredible 34%, 30% and 33% respectively over the past 12 months, hitting multiple all-time highs in the process.

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Our local ASX 200 index is up a relatively restrained (but still impressive) 21.5% over the same period.

From an investor’s perspective the critical question is — when does the music stop? Not for a while yet, Ausbil says.

Ausbil’s view is that economies will run ‘hot’ for some time, with the support of policymakers, to deliver “the best growth figures since 1983, across a multi-year growth profile”.

It would be tough to expect markets to achieve the same level of performance over the next year, but “underpinning the markets will be another year where we expect strong earnings per share (EPS) growth”, says Jim Chronis, chief economist & associate director at Ausbil.

“We still think that the market is under-estimating the rebound in earnings that will occur in the prevailing economic conditions, with low rates, and world economic growth a strong tailwind,” he says.

 

Where is Ausbil investing?

Investors should be looking to capture this multi-year earnings growth while it is on offer.

“While Ausbil maintain a positive outlook on earnings, this is still a time to invest in only the best quality companies, which exhibit superior underlying earnings growth and strength, to achieve longer-term outperformance,” Chronis says.

“Key sectors where we see earnings surprise are banks and resources.”

Moving into July, Ausbil’s large cap strategies’ top overweight exposures — comprising higher than normal percentage of a portfolio — are in Metals & Mining, Banks, Transportation, General Insurance, Steel, Online Services, Pharmaceuticals & Biotechnology, Hotels Restaurants & Leisure and Construction Materials.

The top-ten underweight – or less attractive — exposures are in Life Insurance, Containers & Packaging, Utilities, Capital Goods, Food & Drug Retailing, Diversified Financials, Telecommunication Services, Gold, Real Estate Investment Trusts and Retailing.

 

The start of a ‘multi-year growth cycle’

The US’s current expansion is comparable to where it was in around 1963, representing the initial phases of what is expected to be a comparable multi-year growth cycle, Ausbil’s Paul Xiradis says.

A similar conclusion can be drawn presently for Australia.

“Australia’s economic growth, and the current resources boom, will underpin the Australian dollar, with Ausbil forecasting the AUD/USD in an up-trend: 75-80c for 2021, 80-85c in 2022, and 85-90c in 2023,” Xiradis says.

“This low-rate environment, and the multi-year economic growth outlook, is supportive of an underlying multi-year growth outlook for equities, especially in cyclical sectors, banks and in resources as world demand grows.”

“Our house view is that this expansion has some time to run. We see 2021, 2022 and 2023 as strong EPS growth years for Australian equities, and we are invested accordingly.”

 

What about inflation?

While inflation will remain an ongoing source of worry as the perennial flipside to growth, history tells us these fears may be unfounded.

It is Ausbil’s view, and indeed that of most global central banks, that inflation will not be a problem as the world economy returns to health and sustainable growth.

“Looking back to look forward, the historical lesson from the ‘hot’ economy of the 1960s is analogous to our current situation and shows that it took a number of years for inflation to become a material problem for the US economy,” Xiradis says.

“As the expansion gathered momentum in 1963, adding jobs and reducing the unemployment rate, the data shows a relatively static level of inflation for a number of years (between 1961 and 1965).

“After 1965, as unemployment is falling towards its full employment level, inflation becomes more sensitive such that by 1966/67, inflation has moved above 2%.”

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