The dogs and darlings of 2021 (and the stocks to watch in 2022)

Just like Tim Paine for cricket fans, La Niña ruining Summer plans, or the new Home Alone reboot (or as some people call it, a colossal waste of time), the S&P/ASX 200 has had a handful of disappointments (or dogs, if we are being honest) in 2021. 

Every portfolio has at least one - or a few - and even the professionals will make some bad calls. But with the Index racing around 10% ahead since the beginning of 2021 (despite inflationary fears, lockdowns and new COVID variants), there has also been a fair share of darlings. 

So in this end of year special, Livewire's James Marlay is joined by Tribeca Investment Partners' Jun Bei Liu and Market Matters' James Gerrish for their take on the highs and lows of 2021. 

Plus, they also point to the headwinds and tailwinds investors should look out for over the year ahead, as well as a few winning stocks that could soar in 2022. 

Note: This episode of Buy Hold Sell was shot on Tuesday 7th December 2021. You can watch, read or listen to an edited transcript below.

Edited Transcript

James Marlay: Hello and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay and we are nearly over the line on 2021. It's been a tough year. There have been highs, there have been lows. And who better to talk about highs and lows than James Gerrish from Market Matters and Jun Bei Liu from Tribeca. Great to have you both with us today.

Now, readers, get your pens out. Before we get into the show today, I have a little quiz for you. And no cheating, no Googling on the questions here. Get out your pens, write down your answers and I'll tell you at the end of this video. No Googling.

• What was the best performing ASX 200 stock in 2021 year-to-date? 
• What about the worst-performing stock? 
• What was the best sector? 
• What was the worst sector? 

James, if you had to describe markets in 2021 with just one word, what would it be and why?

James Gerrish: I think I'd use the word rotation. I think it's been a year where we've seen huge changes around the thematics, sectors and stocks that investors have backed. And all of those things have come in and out of fashion in pretty aggressive periods over the last year. So rotation would be my one word for 2021, Jimmy.

James Marlay: Okay, great. Hold that thought. Jun Bei, what's the word that you'd use to describe markets in 2021?

Jun Bei Liu: I would still call it successful and post a very successful 2020 as well. We had inflationary fears, we had many virus variants - now we have Omicron. And we had the trade war, we had geopolitical risk. We had all these issues and yet we continue to push all-time highs. And that's been incredible resilience in the market. 

James Marlay: So Jun Bei, positive surprise this year, well it turned out okay. What was the most unexpected thing that happened in 2021?

Jun Bei Liu: As I talked about before, the most unexpected thing was how resilient the market has been. Given the pandemic, it's been a health crisis. We never really fully resolved the health crisis. And we keep coming up with different variations of the virus and yet the market keeps pushing higher and higher and it's proved itself to be incredibly resilient. And this is at the time where we have all these fears about inflation. And the corporate earnings recovery hasn't been exactly smooth. So just how resilient the market has been. And it does give you a lot of confidence in terms of where it heads over the next 12 months.

James Marlay: Okay. James, what about you? What was the unexpected thing that happened in 2021?

James Gerrish: Jun Bei just stole my thunder in terms of resilience. So I completely agree that the market has been incredibly resilient over the last 12 months or so. I think the other thing that's really been interesting this year has been the rise of crypto and the validity or the acceptance that crypto has generated over the past 12 months. I'm not saying it's the right thing, but the number of people out there who are now involved in the crypto space has really caught me a little bit by surprise. So the resilience of markets and the rise of that thing called crypto.

Jun Bei Liu: Actually, that's really interesting, right? Even the Commonwealth Bank's caught on to it. They're providing custodian services for the cryptocurrency space. 

James Gerrish: And if you think about what validates something it's acceptance. So I think that's really increased, aside from what Warren Buffett has to say about crypto and the comments that he makes about it. It's that acceptance that's really built over the last 12 months or so.

James Marlay: And it feels like it's still gaining momentum.

James Gerrish: Yeah, absolutely. And I think there's going to be more to come. I don't know what crypto is going to be successful. It's really hard to tell. But I think the premise behind it has a foundation.

James Marlay: Yeah, interesting. So, James, this is the one that hurts. And we all have them. What was the worst-performing position you had this year? What went wrong and what's the future for that position? Is it on the chopping block or are you going to try and resuscitate it?

James Gerrish: Well it's on life support at the moment. So we're still holding onto it. Our worst position for the year was Service Stream (ASX: SSM). They had a number of things that hurt them throughout the past year. Firstly, it was around the NBN and the weakness in the NBN space. They also had some big labour issues. So obviously, COVID has been difficult to get people out on site. And that really hurt Service Stream. Overall, that had a negative impact on margins and they saw multiple downgrades as a result of that. Ultimately, they then raised capital to buy Lendlease Services business, which I think will prove to be a positive acquisition. There's just some pain to wear in the medium term. So we've kept a small position. We'll up weight it once we see signs of a turnaround. I think the position was down 50% this year. So not a great one in a rising market, James.

James Marlay: Yeah. Tough one to hold. Jun Bei, same question for you. What was the one that kept you up all night? The one that gave you the sweats, the one that you didn't want to look at when you turned the screens on in the morning?

Jun Bei Liu: Look, this one, I wouldn't say it kept me up at night. If anything, I think it just provides a good buying opportunity and it's more of a long-term position for us. So the stock is Ramsay Health Care (ASX: RHC). Look, the share price has done nothing since the recovery of the pandemic pretty much. Obviously, with private hospitals, it's meant to play that reopening theme, with earnings recovering as a long waiting list of people come back to the hospital. But of course, we know we have had many lockdowns and shutdowns that's affected its recovery. And then its offshore operations in UK and France, France especially, continue to be impacted by high rates of infection over there.  

The business has a good balance sheet, it's just a slow recovery. And now it's been hit with something else, which is the lack of availability of nursing staff. So the staff cost is going higher and then it's yet to return to full capacity. 

But it will, simply because, on the back of reopening, the queue for beds in private hospitals is enormous. And earnings will come back. It's just taking much longer than we initially expected. We all thought the COVID recovery would be a straight line. And clearly, in real life, there are many variations. It takes time to come back. But it's a good business. We're happy to sit there. And it's a bit of a bottom drawer type of stock.

James Marlay: Well, let's get out of the hospital, out the operating theatre. Let's go from flat line to heading north. What's been the stellar stock in your portfolio? What did the heavy lifting?

Jun Bei Liu: Oh my goodness. There are so many.

James Marlay: Just quietly.

Jun Bei Liu: Just quietly. But let's talk to this one. And so this one we actually have held for a very long time. That's Pinnacle Investment Management Group (ASX: PNI). So just an incredible management team, and an incredibly diverse portfolio of asset/fund managers. And one thing we know about fund managers is that they all have different styles. Some are Growth, some are Value and some have a bit of mix and some do different things, like Quant or Fundamental. Sometimes certain macro conditions will work for some and not for others. And for Pinnacle, because they've got a diversified portfolio as a group they actually complemented each other very strongly. And because Pinnacle's got such a strong distribution team, they actually have grown those managers significantly under their umbrella. And they have actually bolted on quite a few new managers in recent times and the FUM (funds under management) is growing enormously. So this company has done incredibly well and we think will continue to do very, very well going forward.

James Marlay: So you're hanging onto your position in Pinnacle?

Jun Bei Liu: Absolutely.

James Marlay: Okay. James, out of the many stocks that went up in your portfolio in 2021, which one did the heavy lifting?

James Gerrish: There was so many. There was so many. I think the one that springs to mind is Altium (ASX: ALU), which has been a really strong success story in '21. I think it's been a volatile ride. And just like Jun Bei's pick in Pinnacle, which I completely agree with the foundation for owning that position, Altium has had some ups and downs. They obviously had a takeover offer from Autodesk over in the US which they were pretty adamant in rejecting. And they came out and had some issues around margins and resetting market expectations following that. But they've done a really good job. They had confidence in their business. And it's really good to see an Australian company with such a key service product on the global stage that is being sought after. So for me, Altium has been a great success story this year. I think it'll continue to be. And that confidence that management showed in the face of high volatility in rejecting what seemed to be a really good offer at the time provides confidence in my view of the stock.

James Marlay: Alrighty. Let's turn from looking in the rearview mirror, get out the crystal balls, and have a look at 2022. What are some of the tailwinds and headwinds or pick a headwind and pick a tailwind that you think is going to move markets next year or have an impact, something for people to be aware of?

James Gerrish: I think the two things are interrelated. So the thing that I've looked for over the last four months is the rate of change in money supply, which has been phenomenal since the pandemic. So in 2020, the rate of change in money supply was about 25%. If you look back historically, you see about a 5% change in money supply. Coming out of GFC, we saw a 10% increase in money supply. Coming out of the pandemic, it's unprecedented at 25%. So that obviously underpins growth, which is positive for corporate earnings. And we've seen corporate earnings come through very strongly over the last 12 months. 

But it also has other ramifications that I think we'll see down the track. So cheap money out there, and huge amounts of liquidity. At some point, that will create bubbles and it'll force central banks and regulators to come into the market and perhaps stifle things more than they would've otherwise. So the last time I was on with Jun Bei, we talked about inflation being transitory or not. And I think that's going to be a really key risk for the markets going forward. I know we've spoken about it a lot and it's well known by the markets, but if we think of a risk going into the next 12 months, it's certainly that.

James Marlay: Okay. I'm not going to hit you for a headwind or a tailwind stock, but maybe a company that you think rides a tailwind next year?

James Gerrish: So if you think about headwinds and tailwinds, then if the headwind is around rising interest rates potentially at a higher rate than the market is expecting, then you need to be conscious of those high valuation growth stocks. So I'd call out WiseTech Global (ASX: WTC), which is a company that the market absolutely loves. It's trading on 23 times revenue. It's growing sales at 20%, which is great. But if it has a hiccup in '22, it'll get slammed. 

If you think about the other side of the equation, you want to be holding stocks that are in Value territory. So Virgin Money (ASX: VUK) might be one to put on the radar. It's trading on 0.4 of book. It's had a tough 12 months, but the strategy around the digitisation of that business has a foundation. And there's not a lot baked into the cake. So I think expectations going into '22 are going to be really important; what's built into stock prices already.

James Marlay: All right. We'll finish with you there, Jun Bei. Tailwind and a headwind for 2022?

Jun Bei Liu: I think it's kind of similar to what James was saying. That in terms of a tailwind, our corporate earnings are still strong and partly because we had a few hiccups with the reopening and lockdowns. And now coming out of it, we should have a pretty good Christmas. 

Consumers are looking very strong. They have saved a lot of money. Savings are really, really high. I think in the last 12 months they have saved something like 10% of the GDP. Normally, they save 2% to 3%. So it's a lot of money sitting on the balance sheet for the consumer, for the household. And the corporates are sitting on very, very good balance sheets. That's why we started seeing a lot of mergers and acquisitions and buybacks taking place. So all of that for the economy means it's pretty healthy at this point. And if the new virus variant doesn't create any significant issues, that trajectory should look pretty good for corporate earnings.

So that is going to be a tailwind for all of us around the world. We should see that continue to pick up momentum. China will potentially stimulate it a little bit. So all of that looks pretty good. 

Now, the headwind of course, or that easy liquidity James was talking about earlier, means it's going to get harder. We have so much money being thrown at all the economies because of the pandemic. These are emergency levels of liquidity. But next year, we are heading into the beginning of the tightening. So it's nothing to be alarmed about, but it just means that emergency levels of easy liquidity, or cheap money, are no longer necessary. Because look at the interest rate: it was so much higher before the pandemic hit, and our economy was okay. It was actually on the way to recovery. And then the pandemic hit, we had to lower it. But now it's sort of still significantly below what it was. So we will be on the path to tightening, which means some of those super expensive companies might be under a bit more pressure, especially if they don't make a profit.

James Marlay: So with that positive corporate earnings but maybe tightening of the easy money that's been around, is there a name that does well in that environment?

Jun Bei Liu: So, I am a little bit less macro when I run my portfolio because while I believe that in the next decade, yes, the interest rate will go a little bit higher, it's not going to go as high as everyone says it will at the moment. It's going to be, over the long run, lower than what everyone expects because productivity is going to be tough. So on that basis, it's going to be harder and harder to get growth in corporate earnings. So the structural growth leaders or growth companies will still be highly sought after. But we don't have a growth issue in the market, we have a valuation issue. For the super, ultra, spicy stocks that don't make money and trade on very high multiples, they will be under a lot of pressure.

But in this environment, other growth companies might get sold off temporarily. And I'll be happy to step in to buy them. Things like Seek (ASX: SEK), things like REA (ASX: REA). They're expensive, but they're so much cheaper than some of the really high-end growth companies. But on the value end, when we talk to the cheaper cyclical companies, you've got to be mindful as well. Because they may be very cheap, but a lot of time they're cheap for a reason. Right? And the minute there is any hiccup in terms of growth or outlook, these companies will get sold off very quickly. But some of the businesses will be leveraged towards global recovery. 

Normally, I don't push mining stocks. But certainly recently, a company like BHP (ASX: BHP) has been sold off massively. And yet, their peers, specialised miners like copper and other things have done so much better. Just because investors are now sort of funding the big ones in some of the more hot areas. And that could well reverse next year because this company is going to generate so much cash flow, it's going to be incredible.

James Marlay: Okay, great. Well, that's the highs and the lows from James and Jun Bei. Now, get your marking pens out, get your red pens out. I'm going to give the answers to our little quiz. 

The best performing stock in the ASX 200 was Pilbara Minerals (ASX: PLS) up 170%, a superb outcome. The worst performer was Polynovo (ASX: PNV), down 65%. The best sector, this one stumped us all, was the telcos, up 31% with Telstra (ASX: TLS) doing the heavy lifting. And the energy sector was down 4%. And that was the laggard for the ASX. Now if you get four out of four, give yourself a pat on the back. Hit subscribe because we've got heaps more great content coming to you over the summer.

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