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Why 2021 is shaping up to be a brighter year for Aussies

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Experts are forecasting a much better year for Australia in 2021, with growth stocks set to take centre stage.

The speed of the global recovery hinges on the distribution and effectiveness of a vaccine.

"The rollout of a COVID-19 vaccine may come too late to stop another severe virus wave and the economic disruption may only be partially mitigated by a more modest fiscal impulse in the US," says Salman Ahmed from Fidelity International.

2021 outlook future looks brighter

"In the medium term, the recovery will depend on how well the sharp expansion of debt to deal with the COVID crisis is managed and which path countries take towards debt sustainability, voluntarily or involuntarily."

Australia finds itself in a better position than most.

"One thing we can be reasonably sure of is that overall 2021 is likely to be a better year than 2020, with more light at the end of the tunnel as the year progresses," says Randal Jenneke, head of Australian equities at T. Rowe Price.

"We regard the Australian economy as being in as good shape as any of the developed economies. Australian society is largely back to normal, companies are seeing activity and profits rebound and Australians, with few foreign travel options, are spending more at home, with the result that some areas of the domestic economy are doing well."

The Reserve Bank's baseline scenario forecasts growth of 5% over 2021 and 4% over 2022.

This will be supported by an abundance of cheap money. In response to the pandemic, the RBA cut the cash rate to the bone - 0.10%, an historic low.

Westpac chief economist Bill Evans believes this rate won't be lifted until unemployment drops closer to 5.2%, which he expects to see sometime in 2022.

Evans also expects the Reserve Bank to continue its quantitative easing (QE) program, through which it purchases bonds in order to artificially hold the three-year government bond yield at a target rate at 0.25%.

"We're expecting the RBA will extend its quantitative easing program, which is set to expire in May, by another $100 billion, which will take it to November 2021," he says.

"Then we're expecting another two $50 billion programs to early May 2022 and early November 2022."

While QE will help promote liquidity in the economy, it will also put upward pressure on the Aussie dollar. This is good news if you plan to buy investments overseas in foreign currency or shop online via foreign retailers. On the flip side, out exports will be less competitive with a higher dollar.

Aussie equities are well positioned for 2021.

"The negative short-term economic costs and disruption from the coronavirus do not detract from the longer-term positive case for Australian equities," says Jenneke.

"Turning to investment opportunities, we favoured some of the high-quality growth stocks that can benefit from a low-growth, low-inflation and low-interest-rate world.

Jenneke thinks companies such as medical device manufacturer Resmed are showing that their business conditions are starting to improve and normalise.

"There are a number of other quality growth stocks, which we believe are in a similar favourable position to Resmed, such as James Hardie, Seek Group and Aristocrat."

Gains should also be more evenly spread across the market next year.

"The market is also less at risk from a small number of highly valued large growth stocks, and returns this year have been more evenly distributed across sectors, including consumer discretionary and communication services.

However, don't expect iron ore companies such as Fortescue to enjoy the momentum they experienced in the second half of 2020, which came about thanks to China going on a construction spree coupled with a reduced output from Brazil's Vale mine.

"After the recent strength we have taken some profits on iron ore producers and the materials sector, as we think the best news on China's economic recovery in momentum terms is behind us."

We're cutting through the confusion to help you manage your money during the coronavirus outbreak. Click here for more on how COVID-19 could affect your job, budget, super and investments.

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David Thornton is a journalist at Money magazine. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.
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