As the first trading week of 2021 nears its end, the new year continues in the path of the old — delivering new global share market highs.
Despite the extraordinary turmoil on display in Washington DC, where rioters stormed the US Capitol Building to protest Joe Biden's confirmation as president, every major US share index closed at new records yesterday (overnight Aussie time).
The S&P 500 Index (SP: .INX) gained 1.5%, while the tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) again led the charge, closing the day up 2.6%. That puts the Nasdaq up more than 43% since this time last year.
Gold shares dip, tech shares rally
In late afternoon trading, the S&P/ASX 200 Index (ASX: XJO) is following the US lead higher.
The ASX 200 is up 0.5% today, for a gain of 2.4% since the closing bell on 31 December. That's still 5.8% below its own all-time high, set on 20 February last year. But the upward trend since the 23 March trough remains in place.
While most gold shares are trending lower today, ASX tech shares are supporting the broader rally. The S&P/ASX All Technology Index (ASX: XTX) is up 1.6% in intraday trading.
But it's important to remember these are just daily moves. Unless you're day trading (good luck!), you may be wondering which ASX shares could be best placed to outperform through 2021.
As you're likely aware, 2020 saw both well positioned gold and tech shares deliver outsized gains. Today we look at why they could have another good year ahead of them.
But first…
What's a little insurrection between friends?
For the past two months, as you may recall, analysts the world over have been tripping over themselves to explain why a divided US Congress would be best for share markets.
In that scenario Joe Biden and the Democrats would have held the White House and the House of Representatives, while the Republicans would have had the majority in the Senate. That would have enabled the Republicans to keep a stronger check on some of the Democrats more ambitious programs.
It all came down to the runoff Senate election in Georgia this week. But that election ended up effectively handing control to the Democrats. With the Senate now equally divided (50-50) between the two parties, Vice President-elect Kamala Harris can cast any tie breaking votes.
The result?
While Biden still needs a two-thirds majority in the Senate for many policy changes, the US can expect more funding on green energy, infrastructure and fiscal stimulus spending.
Given the performance of the US markets yesterday, it appears investors' animal spirits were stirred by a lifting of the uncertainty and the promise of more easy money. (Though this may all come with higher taxes and regulations down the road.)
After all, what's a little insurrection between friends when the economic outlook remains strong?
Here's what Nick Colas, co-founder of DataTrek Research wrote in a note (from Bloomberg):
Markets (rightly, in our view) see the U.S. government as ultimately a stable-enough set of institutions even if things occasionally go pear-shaped. Politics play second fiddle to economic and corporate fundamentals when it comes to setting asset prices. The country's economic future coming out of the pandemic remains promising.
Looking ahead, Janus Henderson head of multi-asset Paul O'Connor said (from the Australian Financial Review):
Financial markets will likely focus on the prospects of more fiscal stimulus in the US in the short term, and higher taxes later on. Beyond fiscal policy, investor attention will now shift towards other areas of the Democrat policy agenda such as infrastructure spending, minimum wage increases and greater regulatory intervention across key industries.
Still, given that implementing legislation in many of the areas will still require 60 votes to pass in the Senate, it seems right to expect a 'light blue' version of the Democrat policy program, rather than the most radical version.
And Andrew Husby, a Bloomberg economist, writes:
We think additional near-term pandemic relief and accompanying stimulus could stretch into the $600 billion to $800 billion range. Subject to details and the course of the pandemic, the high end could be sufficient to lift growth by roughly 1.7 percentage points in 2021, to 5.2% year-over-year, with a faster pace continuing into 2022.
The case for ASX gold shares
With the US government potentially pumping out US$800 billion (AU$1 trillion) more stimulus spending than had been widely expected, gold may well shine on through 2021.
Here's an excerpt from this morning's Australian Financial Review (AFR):
"The strategic case for gold remains strong in our view," say analysts at Goldman Sachs, who believe it could hit $US2300.
"If I was to say the gold price is to rise close to infinity you would think, 'Macleod is a lunatic'," says Alasdair Macleod, head of research for Goldmoney, the Canadian-listed precious metals custodian.
"If on the other hand, I was to suggest that the purchasing power of the pound or the dollar is likely to collapse to almost nothing you can then understand the argument better."
We'll leave off the near infinite gold price scenario for now. But if the Goldman Sachs analysts are correct, gold (currently trading for US$1,910 per ounce) could gain more than 20%.
That would prove a boon for some of 2020's best performing ASX 200 gold shares.
Like Evolution Mining Ltd (ASX: EVN), which has seen its share price rise 28% since this time last year.
Or Saracen Mineral Holdings Limited (ASX: SAR), which enjoyed a 37% share price surge over the past 12 months.
ASX tech shares for 2021
Justin Braitling, chief investment officer at Watermark Funds Management, remains bullish on some of the best-known tech shares on the ASX. According to Braitling (quoted by the AFR):
Short term I think we'll see a little bit of a correction, before the underlying reflation trade resumes – that being a weaker US dollar, stronger commodities, stronger risk assets, weaker bonds. Those are the four aspects of the reflation trade.
Braitling lists 4 traditional Aussie internet shares where he believes investors should "stay long".
First, there's Domain Holdings Australia Ltd (ASX: DHG). The Domain share price is up 21% since 8 January 2020.
Second, there's SEEK Limited (ASX: SEK). Seek's share price is up 21% over the past year.
Third, we have Carsales.Com Ltd (ASX: CAR). The Carsales share price gained 13% in the past 12 months.
And fourth, there's REA Group Limited (ASX: REA). REA Group shareholders enjoyed a 39% share price gain since this time last year.
So if you've been struggling with whether to invest in gold shares or tech shares in 2021, the answer may be to do both.
