There are many years that investors will easily forget, but 2020 certainly won’t be one of them — especially when looking at the US stock market.
The shockingly brief bear market occurred amid the evolving recovery of the world’s economies, with some of the massive amounts of liquidity and stimulus packages bookending some of the biggest highs the markets have ever seen.
Ignoring the ‘unprecedented’ global pandemic, the 2020 stock market defied expectations and was fuelled by the performance of the US stock market.
Names such as Tesla and Zoom dominated the headlines and their performances matched the hype, with Australian trades in the Elon Musk company up 695 per cent in 2020, totalling US$616m worth of trades. Zoom was up 401 per cent and was traded almost 15,000 times by Stake’s 200,000-strong trader base.
So, what does this year have in store for us?
Renewables running hot
Solar, wind and alternative fuel sources enjoyed outstanding returns in 2020. Our data showed the aptly named Solar exchange-traded fund (ETF), $TAN, and wind energy ETF, $FAN, bumped up 227 per cent and 60 per cent respectively. An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
The US under President Biden will undoubtedly shift back to its focus on renewables and rejoin a host of global powerhouses committing to carbon neutrality by 2050. Currently only 20 per cent of all energy produced is renewable, therefore we’ll see a vacuum of growth in green tech and production companies.
Biden’s government has signalled its support for change with a pledge to inject US$400bn over the next 10 years in clean energy. The flock to renewable stocks is understandable when the size of the market has suddenly increased so dramatically.
The verdict is still out on whether prices will continue to appreciate. It’s one area to watch!
Big tech takes a hit
For those who believe that time is indeed a flat circle and history is bound to repeat itself, I have one for you.
The Nasdaq, which represents the tech sector, has enjoyed back-to-back 40 per cent growth years through 2019 and 2020, but this run could burn out according to a recent analysis. It showed there have been 11 times since 1926 that a sector has had 40 per cent growth for two years running. However, 10 out of these 11 times, the year following these dual positive years finished negative.
Sure, you can do a deep analysis on the positive effect a low interest, low inflation environment has on the predictability of tech stocks’ cash flows and therefore valuations – especially when paired with an unprecedented increase in the US money supply. The momentum is very much trending upwards, but that can shift also. 2021 is a new year, with a new US President at the helm, and a country bitterly divided. Only the market is right, the rest is speculation.
FXA will be a top 5 traded ETF on Stake.
The declining US Dollar has been unkind to foreign investors. In 2020, the USD declined 11 per cent compared to the Aussie; a move spurred by the monumental US monetary expansion. Around 40 per cent of all US Dollars in existence were created in 2020; this naturally meant the currency moved lower.
Savvy traders remained unfazed and hedged their portfolio using $FXA. A low cost, AUD tracking ETF, traders can lock-in the value of cash reserves in their portfolio.
While the Fed has signalled it would like to taper its expansionary operations, doing so is not necessarily feasible. Should the USD continue to slide, FXA will continue to grow in popularity.
Chinese ADRs (American depositary receipts) will shake regulatory hurdles
A general air of caution has existed amongst investors for some time around Chinese stocks, and not without reason. Nightmares like Luckin Coffee’s fraud, the U.S. Securities and Exchange Commission’s reporting stringency, and the recent conflict between Alibaba and the Chinese Government have all contributed to this. It’s a minefield many investors understandably avoid.
But coupled with this perceived risk have been solid returns that we feel will continue. With a middle class of 400 million people, Chinese companies offer a chance to invest in already proven US success stories in a growing and analogous market. NIO is the Chinese Tesla. Baidu is a Google alternative. JD.com is akin to eBay.
In the face of an increased regulatory burden, NIO returned 1500 per cent in the last year. Baidu is up 68 per cent and JD.com grew 118 per cent. $CQQQ, a Chinese technology ETF, netted 60 per cent in 2020. While the same returns cannot necessarily be expected, the reward may match the risk for some investors.
Get em’ while they’re pot
As US Democrats take control of the Senate, coupled with a Biden and Harris campaign backing the decriminalisation and legalisation of cannabis, the sector is filled with potential.
The market reacted to this belief as marijuana ETF $MJ, holding the biggest weed-producing companies, added 75 per cent since October last year. It doesn’t take much to send such a historically volatile sector skywards, especially when it begins trading from historic lows.
Some critics question the President’s true stance on the matter, given his past positioning, but if there’s a time for the sector to receive the regulatory tailwind it has fought years for, it’s now.
A word of caution, do your deep due diligence of any cannabis producer you invest in. The natural volatility in this space, coupled with the paper-thin balance sheets of some of these companies, means holders need faith in their investment choices.
2021 and the new normal
Perhaps the one prediction guaranteed to be correct is to ‘expect the unexpected’, and that we’ll be seeing ‘unprecedented’, overused, again…
Unsurprisingly, every 2020 outlook was redundant just a month into last year. But that resulted in an enormous year for the markets and an equally big year for Stake and its traders. While we don’t have a crystal ball for what the year has in store, the above reflects some of the trends we’re seeing from the Stake trading community. The US stock market continues to provide the depth and opportunity for investors, and the pursuit of wealth by the new age of Aussie investors continues to proliferate.
By Bryan Wilmot, Chief Marketing Officer, Stake.
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