Hedge Clippings | Friday, 11 December 2020

From Gloom & Doom in 2020, through to Zoom, and in 2021, Boom!

As we've mentioned previously, 2020 has been a pretty extraordinary year. However the icing on the cake (is that one metaphor too many?) would have to be The Westpac-Melbourne Institute's index of Australian consumer sentiment, which now sits at a 10 year high.

This is surely the snap-back to end all snap-backs, and one just hopes it's not like the proverbial bungee jump, where you never quite reach the previous level before going into a series of dips, and eventually coming to rest at rock bottom. But, as they say in the classics, "maybe this time it's different".

And all the indicators are that it is different this time. It was certainly the shortest, sharpest recession, and it elicited the fastest, most drastic, and financially dramatic government response that in any other circumstance would have been considered totally irresponsible. The same could be said of Victoria's lockdown, which while it attracted much criticism at the time, was in hindsight the only available option open to Daniel Andrews.

So, assuming Australia is not struck by a "second wave", we now have consumers and households who, having been the recipients of financial support they were not expecting, and not having much opportunity to actually consume, have built up their household savings (or raided their super), and now appear to have a pent-up, relief driven urge to spend it.

And while overseas travel is still a long way off, they only have one place in which to do so.

Many businesses meanwhile, depending on the sector they are in, have also benefited from the government's job keeper and other programs, or for the tradies, a renovation boom and the prospect of a massive infrastructure pipeline. The local tourism sector might be missing the overseas traveller, but they've been replaced by locals, many of whom will spend a lot more than some of the backpackers they replaced.

Enthusiasm and confidence is infectious, and will flow from consumers, through to business, and thus through to employment. Happy Days.

Of course trade with China remains a problem, and one that is unlikely to be resolved in the short or even medium term. It may be easy to say, but possibly there is a silver lining there in the long term as well.

Certain sectors, such as agriculture and education, had possibly become overly reliant on one dominant customer. So being forced to diversify their risk by having to seek out new markets, whilst painful in the short term, could lead to a more robust and broad customer base in the long-term. Paul Keating once famously said "this is the recession Australia had to have", and maybe there is an element of that logic in having to search out new markets.

The release of COVID vaccines will further boost consumer confidence, but is unlikely to see overseas travel - in or outbound - taking off (excuse the pun) in the short term. Not only will it take some considerable time to roll out vaccinations across a sufficient proportion of the US, Europe or the majority of the world's population, but one would assume that the depth and extent of the pandemic's grip will significantly delay a return to normal.

Which takes us to the great unknown in 2021, namely what sort of President will Joe Biden turn out to be, and how quickly will his presidency impact on both the domestic and international stage? 

The other question of course is how Donald Trump will behave at Biden's inauguration?

One would expect predictably!

News & Insights

Video interview with Rodney Brott from DS Capital