“Towards the end of 2020, what we saw was the results from the election and approval of the vaccines that would effectively combat COVID-19. That really injected a lot of value cyclically into the market,” Mr Gurwich said.
“You saw banks rally, energy rally, a lot of the commodity companies rallying. What you saw was a really big adrenaline rush into the markets in the first half of 2021.”
Roller coaster
It may have started with a rush, but the year soon turned into a very unusual roller coaster ride, according to Annie Liu, the former head of supply chain, battery and energy at Tesla, and now a non-executive director at Vulcan Energy.
For example, one of the biggest dramas was a shortage in semiconductors – a complex issue. It started when backend packaging factories in Asia were forced to shut down in mid-2020 due to COVID-19.
Ms Liu said there had been months worth of semiconductor parts sitting in the supply pipeline, but most companies never stockpiled anything. They didn’t need to. Then, there was a sudden crunch in 2020 as Donald Trump’s 2019 sanctions on Huawei clashed with COVID-19. Consumers around the world were suddenly snapping up electronic equipment to work and study from home.
Given there were a limited number of chip factories with capacity to manufacture and supply semiconductors, this shortage was likely to continue into 2022. However, Ms Liu said she believed supplies would start to stabilise towards in 2022 as more supplies come online.
The Green Dollar
Chief investment officer of private banking at Credit Suisse, Andrew McCauley, said the year has seen a significant change in wealthy individuals and family foundations paying close attention to environmental, sustainability, and governance issues (ESG), especially in deciding where they would invest.
“They are coming to us, and they have this new pot of money, and they are saying ‘well we have very strong views on how it should be invested. What’s the overall philosophy?’,” Mr McCauley said.
In the last two years he has noticed ultra-high net wealth clients wanted to invest in renewables to help decarbonise the economy and were putting pressure on companies to eradicate modern slavery in their global supply chains.
Over at investment manager Schroders, portfolio manager Ray David said the firm’s new motto was “beyond profit”. It has also seen strong demand for environmentally and socially responsible investing from the owners of the $9 billion worth of institutional and retail money it manages
Fortunately, the pandemic gave companies a chance to prove themselves. Australia’s banks played a social role during the pandemic when they agreed to defer mortgage repayments for people whose income was affected by the lockdowns.
“That’s a big ESG tick,” Mr David said.
Ramsay Healthcare also improved its ESG credentials when it closed elective surgery and took on lower-margin COVID-19 patients in France, although it did receive a government subsidy for this. In the first half of 2020, Ramsay Santé treated 10 per cent of France’s COVID-19 patients, and earnings grew 65 per cent.
Mergers and acquisitions
If 2020 was the year of fourth-quarter IPOs, 2021 was the year of unusually late mergers and acquisitions. Advisors saw buyout opportunities everywhere because the market was stable enough for management teams to make decisions and economies were still flush with cheap stimulus money.
According to market data company Refinitiv, there was a record high of $173.8 billion worth of M&A activity in Australia by September, a sixfold increase in value on the same period of 2020. There was the $23.6 billion offer for Sydney Airport in September, and the $21 billion merger between Santos and Oil Search.
And if anyone doubted how much money was still sitting on the sidelines right up to the end of the year, CSL’s $16.4 billion bid for Swiss pharma company Vifor in mid-December made it crystal clear.
Within a few days, CSL sucked up $6.3 billion in cash from institutional investors, $750 million from retail investors, used $2 billion of existing debt, and went to capital markets for a further $8.4 billion. No one flinched at its largest acquisition ever.
“We don’t expect the level of M&A activity to continue as it has in 2021,” Mr David said.
However, he also warned that “the worst deals are done at the top of the market”, and CSL-Vifor was no exception.
“Vifor is a specialty pharmaceutical business, with revenue dependent on new product launches to offset patent expiry on existing drugs,” Mr David said.
“So, inherently it’s a lower quality business, being acquired for a very full price. On top of that, the $6.3 billion capital raise is one of the largest equity raises this year, and so it will take time for the market to digest all that equity raised. So for these reasons, we are cautious on the acquisition.”
Materials and commodities
Prices spike in mid-2021 for two of Australia’s biggest commodities – iron ore and coal – as China raced to make steel needed for domestic and foreign infrastructure projects launched by governments to keep their economies going.
Like many energy sources, the price of thermal coal out of Newcastle peaked near $US270 ($370) a tonne in October, while iron ore prices peaked around $US189.6 ($256) per dry metric tonne in July. The share price of iron ore miners fell as prices then dropped below $US100 in November.
But for lithium miners, stock prices kept rising right to the end of the year due to insatiable thirst for battery-ingredient minerals like lithium, nickel, and rare earths. The green dollar kicked it higher after the Glasgow climate conference.
Lithium miner IGO has gained nearly 70 per cent this year, while Orocobre, which changed its name to Allkem, has jumped close to 102 per cent. Pilbara Minerals has jumped over 170 per cent.
“Whether this is going to crash again in the near future similar to 2018 and 2019?…I don’t think so,” said Ms Liu.
“Back in 2018 most electric vehicle (EV) original equipment manufacturers (OEMs), except for Tesla, were not ready to commit, resulting in an over-supply situation in the market at that time.”
“Now fast-forward to 2021, with governments around the globe serving as catalysts to unlock the EV narrative, and combined with increased commitment by automakers,” she said, predicting ‘hockey stick growth’ and adding there was not enough supply of lithium in the near term to meet the aggressive EV growth outlook.
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