Beware the ‘taxi driver index’: Have markets hit peak optimism heading into 2021?

CMC markets analyst Michael McCarthy says it’s no secret the ASX has been on a tear and he fears we’ve just about hit the peak.

“They call it the taxi driver index,” McCarthy says.

“Because when your taxi driver or Uber driver asks you what stocks they should buy, you know it’s time to sell.”

Too much of a good thing?

By early December the ASX 200 had repaired the damage done in 2020 as it continued its nine-month rebound from one of the most severe bear markets on record. The cavalcade of analyst outlooks released in recent weeks have generally supported that the year-ending rise will continue into January and February as equity markets remain an attractive destination for capital.

“As we look to 2021, we find ourselves optimistic again, despite the tough year,” says Natixis’ head of global market strategy Esty Dwek.

“That said, one thing we learned from 2020 is that we should always expect surprises.”

With business and consumer confidence surging and Australia’s economic recovery charting better-than-expected Airlie fund manager Matt Williams says it’s easy to feel positive looking into the future. He also notes record low interest rates – as well as a tide of stimulus that is yet to be withdrawn – will continue to drive people to a market that can offer a decent return on equity.

“The amount of capital that’s available around the world … it’s finding new homes and this valuation spread has got to a point where they can’t be ignored,” says Williams.

However, much like McCarthy, IG Markets analyst Kyle Rodda is also astounded at the apparent complacency shown by investors that the party will roll on.

“There’s a lot of risk out there at the moment but the market seems to be comfortable with it – and that probably because of policy support as well,” Rodda says.

“It really is a question now of how much more positive news can be priced into the market and how much can it continue to run.

“I suppose the concern in these situations is that we’ve got a market that just doesn’t seem to be able to articulate the risks at the moment. Everything seems to be just fine.”

McCarthy certainly does not think the momentum will last.

“Just about everything I read and everyone I speak to other than the old hard heads like myself are optimistic,” he says.

“They say ‘there’s a Christmas rally coming’, ‘there’s a 2021 rally coming’, ‘we’ve got a vaccine’, ‘China relations couldn’t get any worse’… people are taking the glass half full view of everything in the market at the moment and I think we’re at peak optimism.”

“They’re buying the dip, they’re buying the five tech names, they’re buying on anything and everything. That to me is a sign we’re not far from the top.”

Vaccine variables

While they might not all agree on the outlook for investments, market watchers seem to have accepted that any chance of a return to economic and social normality rests with a coronavirus vaccine.

Even as the death toll in Europe and the US rises through the second and third waves of the coronavirus, Natixis’ head of global market Esty Dwek says recent announcements from the likes of AstraZeneca, Pfizer, and Moderna have dramatically changed the outlook for the pandemic.

However, she notes hurdles remain in the race for immunity.

First, she says broad-based immunisation is unlikely before mid-2021, and probably even later for emerging markets in developing nations, suggesting painful months ahead.

Second, logistics remain a challenge.

“Not only do some of the vaccines require below-freezing temperatures for storage and transportation but ramping up production sufficiently and rapidly is likely to prove difficult as well,” Dwek says.

“Moreover, willingness to be vaccinated is not a given, even among the more vulnerable segments of the population.

Others, meanwhile, fear any hiccup in the design or distribution of a successful vaccine could be a rude shock for a market that has already largely priced in a recovery.

“Clearly a delay on the vaccine timeline now would, of course, be a disappointment to markets also,” says Saxo Bank’s Australian markets analyst Eleanor Creagh.

“But I think that aside, positioning wise, markets are going to continue to look ahead to the post-pandemic world next year and increased immunity,” she said.

Meanwhile, even the most optimistic acknowledge that a better-than-expected rebound means it could be years before the most downtrodden sectors of the economy – travel, tourism, energy, property and international education – make a full recovery.

“You’ve seen the markets obviously start to pop, they’ve been boosted by the vaccine,” says Airlie’s Williams.

“But there’s still, at least for six months, probably a period where we’ve still got to deal with the virus in the US. And bridging that period is going to be quite interesting.”

Stimulus question

Chief among concerns in 2021 for MLC head of investment Al Clark, is how companies and investors will react to the removal of stimulus programs that have – and continue to – paper over the cracks.

He says the river of government support – while undoubtedly a boon for many during an unprecedented year of hurt – is perhaps masking the worst of the damage done by the pandemic.

“We’ve still got JobKeeper … and while we’ve got this amount of stimulus and it is still paying people’s wages, it’s really hard to know which sectors do still need to be on life support and how much they need until you let them on their own two feet,” Clark says.

Clark says the clouding effect of the payments have made it hard to understand how severely the cyclical and structural fundamentals of businesses have been warped.

“While you’re waiting for some of this fiscal stuff to end, you’re still not even really sure what you’re trying to disentangle,” Clark says.

“How much of (the market’s rise) is due to the vaccine opening things back up and people going back?”

“We just don’t know how disruptive COVID has been.”

The world stage

While there is no shortage of hurdles for equity investors on local shores, geopolitics and trade tensions are set to remain one of the key non-pandemic risks.

Ructions between Beijing and Washington – as well as China’s escalating brawl with Canberra – added an extra level of complexity to an already disrupted year.

One view is that November’s market-friendly US presidential election result will be a soothing balm at least for US-China relations – even if the most noticeable change with the exit of Donald Trump is one of tone and not substance.

“It does seem to be the expectation that Biden lowers the temperature a bit… but it is a fairly bipartisan view in the US that it’s got to be tough on China,” says Airlie’s Williams.

Saxo’s Creagh agrees the US-China relationship should be less volatile which, in turn, could add to the favourable set up for Asian assets due to the region’s virus handling of the virus and the ongoing reopening.

But the trade relationship between Australia and China will continue to prove complicated for export-exposed stocks, though iron ore so far appears to have been left out of the equation.

“I know it sounds somewhat flippant to say ‘diversify to other markets’… but I think that is going to be the long term trend,” she says.

The rebound

Ultimately, if all goes well with vaccines, the prevailing view among analysts and fundies believe that 2021 will allow investors to turn the page on the COVID pandemic as markets, economic growth, and company earnings revert to some sort of normal.

Ausbil’s managing director Paul Xiradis says he is confident the unfolding economic recovery will benefit both growth and cyclical businesses, supported by accommodative monetary and fiscal policies.

“The vaccine trade and the broader economic recovery is likely to see all ‘boats rise with the tide’, no matter how large or small,” he says.

Airlie’s Williams, meanwhile, believes the current fiscal support should also be enough to support elevated expectations for the upcoming profit season.

“Trying to guess the market is a pretty useless exercise… but all things being equal we’re pretty positive,” Williams says.

“I mean, you know the amount of capital around the alternative, which is, what, 10 basis points in the bank?”