This article appeared in the February 2015 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Nine predictable themes for the year ahead.
By Marcus Padley, MarcusToday
Hindsight is a wonderful thing in the sharemarket. Every year there are a handful of things we needed to know, things that cut through all the financial theory, the waffle, the media noise, the analyst prognostications, the research and all the other ridiculous distractions and complications.
So here we are, in early 2015, and making predictions for another year.
There are two types of predictions - the predictable and the unexpected. First, the predictable.
The standard formula for commentators and strategists making forecasts for the year is to predict that what happened last year will happen again and more immediately, to predict that what is happening now will continue.
Keeping it simple is no bad thing, because when it comes to being an investor, using what's happening now as the template for the future is actually the best guess. A continuation of the current trend is always the most likely outcome.
The strategists might play it safe but the truth is that there is not much money in the predictable and most money is made out of what isn't expected, because that's what moves share prices.
If you look at the top 10 and bottom 10 performing stocks in the ASX 100 or 200 at the end of any period you will realise that those with the biggest price movements did something unexpected.
BHP Billiton will not go up or down if it hits its forecasts, but will if it beats its forecasts, misses its forecasts or is subject to some unexpected and therefore unlikely event.
Understand that and you will begin to realise that for investors trying to make money, there is very little value in a price-earnings ratio or dividend yield based on consensus forecasts, because everyone knows those forecasts and those earnings are expected. The money is in what happens to those forecasts, how the numbers change and what is not known. The consensus, on which almost all research is based, does not move prices.
Let me give you the consensus predictions, the high-odds predictions you can read in almost all strategy comments. Underneath those I have laid out some of the most obvious stock themes flowing from those, and we are looking at factors that could surprise.
The Australian economic trend is expected to continue to decline because of the fading mining sector and the lack of a manufacturing sector. Commodity export volumes may remain high but the Government earns tax on profit, not revenue. As margins are cut, the tax take folds up and the Budget deficit blows out.
Unemployment is likely to head towards 7 per cent by mid-year and that will keep consumers cautious. On that basis it seems hard to get enthusiastic about consumer stocks, although some of the retailers are so bombed out there is going to be the occasional trade in the sector.
There is a good chance Australian interest rates will be cut depending on inflation and employment. Brokers were forecasting a cut in the first quarter of 2015. (Editor's note: The RBA cut rates a quarter of a per cent in February).
The Australian dollar is likely to continue to decline, with some brokers talking about 70 cents. With US rates on the rise (June?), ours likely to fall (February/March?) and our economy weak relative to a recovering US economy, an Australian dollar resurrection appears to be low odds.
It has taken a couple of years, but the theme in the whole financial services sector at the moment is "invest overseas" and everyone is trying to fill that demand. Only 1 per cent of Self-Managed Superannuation Funds are invested internationally, and 30 per cent of the average professionally managed balanced fund is invested overseas.
With interest rates likely to fall rather than rise, yields on bank term deposits will not satisfy investors and Australians will remain obsessed with "safe income" stocks.
They will continue to achieve record profits while complaining about "challenging conditions". Growth is unlikely to excel but banks continue to fit the bill as safe income stocks. As does Telstra. I also think its dividend yield will see Woolworths recover this year, especially after the recent falls.
Mergers and acquisitions
With the Australian dollar weak, expect to see more interest in our companies from overseas, particularly from US and UK bidders. Glencore bidding for Rio Tinto last October is one such example.
More risk than reward. Europe is a bigger economy than the US and twice the size of China. The euro is at a nine-year low. The European Central Bank needs to grasp the nettle or Europe could become an anchor for all equity markets. Europe is potentially a major market threat this year.
At some point the fallen oil price will start to affect supply by marginalising high-cost shale gas production. On the day you hear of large shale gas projects being shelved, there will be a tremendous rally in oil and energy stocks. It is not investment but it will be the trade of the year when it happens.
Santos and Woodside Petroleum are the two most obvious and highly researched exposures. I see brokers already trying to say buy on value grounds, but don't bother until the oil price rally starts.
The same thing applies - don't invest, don't bother doing analysis and don't bother valuing companies. Simply trade the rallies in iron ore and oil. Sentiment is so poor that there will be some ripping trades from the lows. Don't try to predict them; don't listen to brokers telling you oil or iron ore stocks are cheap. Just wait for the rallies to start and take your chances.
A crapshoot but the long-term trend is down, and if forced to choose I think the gold price is going down to $250-$500 and ounce in the long term, which is its very long-term inflation-adjusted average. While gold stocks are good for a trade, I would never "invest" in them.
Predictable themes for 2015
With the above in mind, here are nine of the most predictable stock themes for 2015:
- Safe stocks will perform
The GFC turned the sharemarket into a backwater asset class and despite it being seven years since baby-boomer nesteggs were decimated, the focus on safety persists. Stocks that offer certainty of earnings will continue to be held at a premium and those that disappoint will be punished and rarely resurrected.
- Yield stocks in favour
With interest rates more likely to fall than rise, the obsession with income stocks and hybrids will persist. Telstra, Woolworths, utilities and infrastructure are all likely to continue to outperform.
- Buy banks on weakness
The interest in safe income will mean the banks remain one of the most popular investments in the whole market. Buy on weakness, don't sell on strength. Despite what the scaremongers suggest, there is little risk here.
- International investing
Domestic Australian investors will continue to move more money into international stocks, Exchange Traded Funds and managed funds - a strategy to hedge against a long-term collapse in the Australian dollar. Think 50-60 cents. Many will find themselves buying individual US equities for the first time by the end of the year.
- Wealth management
This sector continues to be underwritten by the Superannuation Guarantee and if the market behaves, will continue to outperform. Some fund managers will doubly benefit through the international investment theme, including Platinum Asset Management and Magellan Financial Group.
- Overseas earnings
As the Australian dollar falls or fails to bounce, the focus will remain on overseas earners. There is a long list of these, including Domino's Pizza, Amcor, Brambles, Ansell, Goodman Group, Westfield Corp, James Hardie, CSL Limited, Resmed, Sonic Healthcare, and Henderson Group. All these stocks are prone to earnings upgrades rather than downgrades.
Some sectors have better drivers than others and will outperform: technology, internet, the cloud, healthcare, retirement and housing. Technology stocks are heavily under-represented in Australia but a huge growth sector in the US. The internet still has plenty of growth and development to come, so keep playing internet-based stocks; there are not many sectors capable of scalable growth in Australia.
Some sectors have volatile unpredictable drivers, and resources is one of them. There will be some spectacular rallies for traders, but investors need not bother.
The housing market will remain supported as interest rates stay down and investors continue to prefer property investment to equities. Housing-related stocks will have generally positive drivers. But as the property market plateaus when the economy wilts and unemployment rises, making money in property will mean doing what people did in the 1980s - buying the worst house in the best street and adding value. DIY/home improvement/suppliers to the housing market will continue to be a strong sector, to the benefit of Woolworths and Wesfarmers.
About the author
Marcus Padley is the founder of the popular Marcus Today investment newsletter, and one of Australia's leading stockbrokers and investment commentators.
To learn more about how Marcus invests, watch this recent ASX Investment video.
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