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Knowledge level: Beginner Reading time: 8-10 minutes
Investors are starting 2021 with cautious optimism as the world anticipates an end to COVID-19, but what actually lies ahead for markets? The investment winners in the year of the pandemic were technology companies, particularly FAANG and WAAAX stocks, along with commodities, including gold and silver. This year may look a bit different, highlighted by these five trends.
1. Global economic recovery from COVID-19
Approved global vaccines are now starting to roll out, but investors shouldn’t assume an instant return to normal. It takes time to vaccinate a population and many countries are still battling severe outbreaks. That said, there’s still much to suggest a positive recovery.
Governments globally have announced generous stimulus packages to revive economic activity. For example, the European Union has approved a package to raise 750 billion euros, while the US has proposed a US$1.9 trillion stimulus package.
Some countries are also considering or resuming broad-scale projects to further stimulate economic growth, with infrastructure one option to achieve this. For example, India, initially subject to one of the world’s toughest lockdowns, has forged ahead with its existing US$1.4 trillion infrastructure program. After being hit hard during the pandemic, it is now well positioned for the future.
Investors looking for exposure to an economic recovery are likely to already be well-exposed to Australian and US markets, so looking to areas like Europe, which is likely to benefit from stimulus programs and growing business and consumer confidence, may be an option.
Alternatively, investors could consider investing in countries like India to access economic growth as well as recovery using an ETF such as ETFS Reliance India Nifty 50 ETF (ASX: NDIA).
2. Low interest rates globally
Interest rates declined further in 2020 to support global economies dealing with the COVID-19 pandemic. The Australian official cash rate dropped to 0.1%, while the lower bound of the US Federal Funds Rate fell to zero. It is likely cash rates will remain low through most of 2021 to support recovery with the potential for increases late in the year.
Low interest rates may see yield-focused investors look outside of fixed income to ‘riskier’ asset classes, such as shares. Low interest rates also typically support commodities, such as gold or silver, because investors may look to these as an alternative to cash to store value and protect against inflation. Investors considering precious metals have access to a range of targeted ETFs on the ASX, such as ETFS Physical Gold (ASX: GOLD), Australia’s oldest and largest gold-backed ETF.
3. Movement to value investments
Investors tend to move away from growth investments like technology in periods of economic recovery or growth. As news of vaccines hit markets in late 2020, investors started to shift towards value investments such as banks and industrials. This is likely to continue across 2021.
The Australian sharemarket is strongly skewed towards financials and resources, which include companies typically falling into value investments.
As such, investors may look towards broad Australian exposures, slightly tailored cross-market exposures like ETFS S&P/ASX 300 High Yield Plus ETF (ASX: ZYAU) or sector exposures to refocus on value investments.
4. Thematic investing
Investors have been increasingly interested in the themes of the future in recent years and being able to invest according to their views and values. This trend is likely to persist in 2021.
Dynamics in the coming year, such as vaccine roll-out or renewed focus on climate change are likely to see biotechnology and sustainability-oriented investments appeal in 2021.
Investors interested in healthcare may take a thematic or sub-sector approach such as healthcare biotechnology through funds such as the ETFS S&P Biotech ETF (ASX: CURE).
Meanwhile, investors focused on climate change may consider the growing range of ETFs capturing sustainability, or alternatively consider battery technology, which is key to the viability of renewable energy. ETFS Battery Tech & Lithium ETF (ASX: ACDC) is the only Australian-listed ETF to offer exposure to the global battery technology supply chain.
5. Short and leveraged investments
Amid the volatility of 2020, many self-directed sophisticated investors took a short-term approach to trading and embraced short and leveraged funds.
There are currently seven exchange-traded hedge funds listed on the ASX covering Australia, US markets and the technology sector, each of which generated significant activity in 2020.
The popularity of these ETFs last year suggests we may see the range of investment products available in Australia continue to expand to support investing based on high conviction views.
Moving forward in 2021
Last year may have been unexpected but it has created some interesting themes for the coming 12 months, whatever else it may bring. Many investors used ETFs in 2020 for fast and efficient access to the market as it changed, and having discovered the ease of using these instruments, are likely to continue to do so in 2021.
For more information on accessing these trends through ETFs in 2021, please speak to ETF Securities directly using the details below.
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ETF Securities Australia Client Services
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Information current as at 18 January, 2021