Making money this year
Guess what the best-performing stock in the All Ordinaries index was in 2015? Bellamy’s? Not quite – it came second. Blackmores? Nope – third. The top performer was St Barbara Mines, the little Victorian gold miner.
St Barbara (SBM) was the year’s only 10-bagger. That is, the only stock to go up tenfold. It started the year at 11 cents and at the time of writing was $1.10.
Why mention that, apart from making us all feel bad because we didn’t buy SBM a year ago (unless you did, in which case congratulations)?
Because the three top performers on ASX in 2015 – St Barbara, Bellamy’s and Blackmores – point to what I think will be the key investment opportunity for 2016. That is China, but in a different way than ever before. China is both the key risk and biggest opportunity for investors in 2016, as it was in 2015.
Its 10-year boom in heavy industry and infrastructure was the source of Australia’s wonderful decade of booming wealth between 2001 and 2011. It drove our huge budget surpluses, a boom in national income and a sixfold increase in the All Resources accumulation index on ASX – an unprecedented compound annual rate of return of 20 per cent over 10 years.
That is now over. China’s economy is slowing and commodity prices have crashed, partly as a result of weakening demand and partly because of supply gluts across the board, as producers attempt to maintain their cash flows.
As a result, the biggest declines in 2015 were, naturally, mostly resources stocks – Atlas Iron, Arrium, BC Iron and, yes, BHP Billiton, which fell from $30 to less than $20 and in the process blew up $60 billion in shareholder wealth.
As the Chinese economy continues to slow, and its investment in infrastructure and housing slows even faster than the economy, the potential for further commodity price falls remains the number one investment risk for 2016.
Upside of China
But there is a very optimistic side to what’s going on in China. The truth is that China’s economy is not just slowing, it’s changing; rebalancing towards consumption and services and away from exports, heavy industry and especially infrastructure.
It is a deliberate plan, ardently desired by China’s leadership, but in any case it’s happening whether anyone likes it or not. Chinese consumers are gaining in confidence, power and, most importantly, wealth.
That’s the point about St Barbara Mines: gold isn’t a commodity like iron ore or copper. It’s a consumer product, for jewellery and just for having, and on top of that, while the gold price in US dollars has been falling, in Australian dollars it has been rising.
Local producers have been increasing their output and as a result are swimming in cash. There is no reason to think that will not continue in 2016, especially if the Australian dollar continues to fall – growing jewellery sales to Chinese consumers at higher Australian-dollar prices.
More generally, the Chinese consumer boom has only just begun. Virtually every Australian industrial and services company CEO I speak to these days has their eyes firmly fixed on China – not because they expect a return of the resources boom, but to take advantage of the consumer boom.
High-profile performances by Blackmores and Bellamy’s in 2015 highlight that Chinese consumers have become the biggest investment fad since, well since Chinese exports.
Of course, booms like this have a nasty habit of turning into crashes, so care needs to taken. But there really are an awful lot of potential middle-class Chinese consumers.
Apart from these pluses and minuses of China in 2016, here are my other threats and opportunities for the year.
- Interest rates start rising. This represents a particular issue for yield investments like the banks, and that has started to be reflected in their share prices already.
- Disruption. Again, the disruptors are coming thick and fast in all traditional industries, including the banks, whether it’s peer to peer lenders, payments providers, including Apple, or currency transfer operators. They are all still quite small, but growing quickly.
- Recession. It’s so far, so good on the economic front in Australia, with Gross Domestic Product growing 0.9 per cent in the September quarter, producing annual growth of 2.5 per cent. That is a bit below trend but not too shabby in the circumstances. But given the collapse of mining investment, it would not take too much of a housing downturn to produce a recession.
- The United Nations climate conference in Paris at the end of November spells the end of the coal industry. Commitments to capping the rise in global temperatures to two degrees by 2100 cannot be achieved while still burning coal to produce electricity.
- Small-cap stocks have started to outperform large-caps, which has been a long time coming. It is partly a function of the issues around banks and big miners, and there are still plenty of pitfalls in the tiddler end of the market, as Dick Smith Holdings and Slater & Gordon so clearly showed. But the tide of money is starting to flow there and the boats are lifting.
- Commodities. At some point commodities will bottom and the cycle will turn. They are still risky, but it won’t be too long before investors have to ask themselves whether it’s time to buy BHP.
- Renewable energy. King coal is dead, long live solar, and wind and maybe even nuclear. And the way the cost of solar and batteries is going, electricity production might even skip the natural gas boom that everyone expected.
- Telecommunications. With cloud computing, IPTV and the internet of things, data traffic is increasing exponentially. No boom is endless, but this one has a long way to run.
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