“The share market prices the future”: As the ASX booms, who stands to benefit, and who misses out?

We were arguably due some good economic news, and a perfect storm of positive developments has seen US share prices soaring to record highs, and the ASX is following suit.

President Donald Trump has finally acquiesced to start handover proceedings to President-Elect Joe Biden, abating the risk of political instability.

At the same time, there have been yet more promising reports of successful COVID-19 vaccine trials, leading to hopes the economy could bounce back sooner rather than later.

Thirdly, there’s the nomination of Janet Yellen as the next Treasury secretary. As the former head of the Federal Reserve, her views on the economy and monetary and fiscal policy are well-known, says Michael McCarthy, chief market strategist at CMC Markets.

“She’s certainly seen by financial markets as a very safe pair of hands,” McCarthy tells SmartCompany.

All of this pushed the US markets to hit record highs. The Dow Jones Industrial Average — an index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange and NASDAQ — hit an all-time high of 30,000 points overnight.

It bodes well for the Australian economy, as the ASX tends to follow the trends that the US stock market sets. Improved international stability is also good for Aussie exporters.

We’re also seeing the benefits of incredibly low numbers of COVID-19 cases in Australia — another factor boosting optimism about a pandemic-free future.

“The share market prices the future, not the present,” explains McCarthy.

“Although none of us know the future, the share market is certainly indicating that 2021 is going to be better than we first thought.”

So, which sectors are set to benefit the most?

Energy

First, McCarthy anticipates seeing support for energy companies on the ASX, calling them “double winners in this scenario”.

A boost to share markets will do them good, he says. And the optimistic outlook for 2020 is pushing energy prices up.

Brent Oil, for example, is up more than 4%, he explains.

All of that “should see the energy sectors as one of the top performers today”.

Finance

Next, McCarthy points to the financial sector. A strong economic outlook is good news here, he notes.

“We sometimes forget that the banks, in particular, but financials in general, are leveraged to the economy.”

Overnight, the US S&P 500 Financials index, for example, has seen strong gains.

“I would expect to see that repeated here,” McCarthy adds.

Materials

With more economic stability on the horizon, McCarthy expects miners of “industrial commodities” such as iron ore and coal to see a bit of a boost today.

There’s a theme emerging here, McCarthy notes. These sectors have “all been pretty badly beaten up” and “languished” during a highly improbable 2020.

Travel

Again, more confidence in an economic bounceback is likely to drive increases in the consumer discretionary sector — that is, non-essential goods and services.

For obvious reasons, such businesses tend to do better in times of economic growth, when people have disposable income to play with.

With Australia’s state border restrictions starting to open up, the travel sector, in particular, could start to see some gains.

“We’ve already seen those stocks start to move,” McCarthy says.

“There could be further support as optimism about the 2020 outlook grows.”

What becomes of lockdown winners?

While all of this hinges on economic recovery, there have been some businesses that have seen huge ASX gains throughout the crisis.

Afterpay, for example, saw its share price top $100, up from $8.90 in March, riding a wave of e-commerce. The shift to working from home has seen cloud-based accounting software provider Xero enjoying a swift uptick in 2020 too.

Such businesses were “very much seen as lockdown winners,” McCarthy says.

A stronger economy certainly won’t hurt them, but it’s less likely they will benefit directly from today’s movement.

“There’s a lot of talk in the market at the moment about rotation away from those lockdown winners to reopening winners,” he adds.

“In broad terms that will mean a rotation away from IT.”

Bricks-and-mortar retail still fragile

Finally, another sector that was hit hard by the pandemic is bricks-and-mortar retail. But McCarthy says that was in some trouble before the pandemic hit.

“Consumer staples have held up reasonably well,” he says.

“But, in an optimistic scenario they’re a fairly dull story.”

While we could see some resurgence in support for selective retail, particularly for businesses that have been hit by CBD shutdowns, he doesn’t expect to see a huge change.

“Ongoing structural questions about the retail sector remain,” he says.