2014 – the Year That Was. 2015 – Still Positive, but No Room for Complacency.
There is nothing more salutary than reading year old Research. Just about all commentators predicted a rise for the Australian stock market over 2014 – but few came close to the measly 1% increase in price terms for the year. The market did do better when one accounts for the additional dividends received throughout the year – so we did outperform cash in real terms. But only just. Given the average total return for the Aussie market over time is over 11% per annum we have some ground to make up going forward. The year saw the market basically wobble between 5000 and 5500 . It was notable for the tempering and recomposition of Chinese growth, a helpful rise in US growth and a tepid European market. Sentiment was not improved by the Ukraine crisis and the renewed turmoil in Iraq and Syria. There was also a major burp in our market as offshore investors left us for US dollar denominated securities. This was followed by concerns about the end of Quantitative Easing and the prospect of higher long term interest rates which saw a short sharp sell-off in our Banks and other yield sensitive stocks– and then major buying back to their previous levels. Finally, the oil price plummeted at the end of the year – and I do not recall seeing too many pundits include that in their 2014 forecasts, although they are now very vocal about it!
Some of the themes that we stressed throughout the year included :
Lower interest rates would be supportive for our yield heavy stocks, (financials, property and infrastructure and Industrials – including Coca Cola Amatil);
A lower dollar would be good for companies with offshore denominated earnings –such as CSL and Cochlear, Macquarie Group , Goodman Group , Brambles etc;
And also for International Exchange Traded Funds and Listed Investment companies.
And, finally, resource and energy stocks continued to drag. Commodity prices have stayed low and, despite the lower AUD being beneficial, it has not stopped companies such as BHP dip to GFC-like levels. And, as we have seen, the energy space has seen some dramatic downward pricing.
Many of these themes will no doubt continue into 2015
And I think we can perhaps finesse some of them.
First, lower interest rates should persist and the dividend heavy sectors mentioned above are likely to remain supported. Companies that offer dividend growth are likely to outperform and these include Telstra, Wesfarmers, AMP, Suncorp Metway and some of the property and infrastructure companies such as Goodman Group and Transurban.
The Banks should continue to offer record profits. Hold the ones we have and buy on weakness.
Secondly, investing in offshore companies will be an important theme either through our own international companies like Brambles, CSL and Ramsay Healthcare; or Exchange Traded Funds like WDIV (global dividends); or Listed Investment Companies like Platinum Capital Let with a 4.5% fully franked yield or the PM Global Opportunities Fund (PGF) ; or Fund Managers such as Perpetual Group (PPT).
Broadly speaking, stay with the Top 25 companies : two stand-out buys are Woolworths and Crown (for more details see the attachment or I can send the latest market Research).
Be selective with Mid Cap Industrials – some of the better companies here include Domino’s Pizza, Flight Centre and FlexiGroup. A number of these are included in our Best Stock ideas (attached) . But, if the volatility and the difficulties of diversifying stock selection are an issue buy WAM Capital Ltd ( WAM) which invests in this sector and pays an handsome 6% plus fully franked dividend.
Who know what will happen with energy prices? There is an interesting analysis in the attached Month In Perspective. Suffice to say that, as surely as the price has fallen, it will stabilise and, as new projects are shelved, we will see a rally. And Santos and Woodside and rest of our Energy complex will rally even harder.
Resources – stick with the majors in BHP and RIO. And only when they move should we descend into the mid caps and juniors that have endured another year of nuclear winter.
For traders, Gold is noteworthy in that this has held the 1100-1200 USD level all year. In AUD terms it has gone up. Newcrest and Northern Star are the two to watch – with Metals X ( MLX) our 10th largest gold producer paying a 5% dividend at current levels!!
Other themes to follow include :
- Healthcare remains a safe growth area as demonstrated by the recent price action in the newly listed Medibank Private (MPL);
- Retirement – I am having a look at the recently floated Estia Health Ltd which is trading at a significant discount to its issue prices;
- Agribusiness – Elders, Nufarm and Graincorp and Australian Agricultural Corp – all starting to trend up (the lower Aussie dollar helps);
- Technology-based stocks – Will this be the year Cloud-based Xero delivers on its promise?
- Infrastructure and Contractors should benefit from renewed Government attention – Lend Lease and Transfield (which has come off after rejecting a takeover offer at a higher price). And Macquarie Bank (for its Infrastructure structuring and financing expertise)
As the attached Month In Perspective implies, 2015 should still be a positive year. But there is no room for complacency and there is always volatility. However there is value to be had through all the usual confusion and noise. People still buy cars and renovate their homes, operate bank accounts and borrow money, add to their Superannuation, spend on consumer goods, buy insurance, use mobile phones and travel. It pays to own a share of this!
John R Goodlad (B.A, LL.B, M.Int Law) | Investment Advisor