The most persistent investment theme in the past couple of years has been (and we’ve told you here) to invest overseas. Colleagues such as Paul Rickard and Charlie Aitken have argued “home for income and overseas for growth.”
They’ve been right and I’m happy about that, but what if you’ve ignored their good advice? Do you change streams now? In case you missed it, the conditions for investing overseas remain strong and I’ll list them below. Have a look at these:
- The IMF upgraded world growth last week from 3.6% to 3.7% for 2018.
- Trump tax changes look more than a possibility.
- Europe is growing better than most expected and its chief central banker, Mario Draghi, over the weekend said there were no signs of bubbles in stocks or bonds. “Let me be clear, I think people are convinced that stocks and shares right now and bonds can go up as well as down,” Draghi said in response to a question from CNBC. “I don’t think we’re living in a bubbly situation.”
- China’s import and export growth accelerated in September, suggesting the world’s second-biggest economy is still expanding at a healthy pace, despite widespread forecasts of an eventual slowdown. This is what Reuters observed: “Once again, China’s imports were led by industrial resources as a year-long construction boom shows no signs of flagging and factories kept humming, boosting demand for materials from steel to copper. Higher commodity prices greatly magnified the strength of the bounce, but volumes surged, too, pointing to still-solid underlying demand.”
- The worldwide infrastructure boom isn’t fully understood but it will sustain economic growth longer than economists like me would normally expect. And coupled with low interest rates, which don’t look like they will be raised too quickly by any central bank, this is good news for stocks.
- This is a unique bull market created by the low interest rate world post-GFC and the crazy productivity and price competition of the digitally disruptive world. Bull markets are usually brought down by rising interest rates and, as I’ve said, these remain less of a threat than usual. “Until you break the wall of worry, until you create more of a trendy market where the bear has something to bite…. I am going to err more on the side of bullishness,” said Jim Paulsen to CNBC. Paulsen is a 34-year Wall Street veteran who I listened to when I was telling people to buy stocks in late 2008 and early 2009. He’s smart and is the chief market strategist for US-based Leuthhold Group.
I think I’ve made a reasonable case for believing in stocks for 2018, at least, but my question is: is it time to get a little contrarian? As I said above, the experts still think we buy overseas for growth and home for income but is it time to start showing faith in the local stock market?
No one rang the bell on the end of the downtrend of iron ore stocks, though I was looking for support when BHP hit $14 and so contrarian buyers benefitted from taking a medium-longer term view. If you had bought at $14 on the belief that it might be a $20 stock in three years’ time, you would’ve been hoping for a 30% gain or let’s say 10% a year before dividends and franking. If you were more conservative, you might have guessed five years before BHP returned to $20 and that would have been 6% a year plus dividends and franking credits.
These were all good bets but it’s now around $26 in about two years! The lesson is the contrarian play on a quality asset when it’s priced inexplicably low is a worthwhile bet.
The Aussie stock market overall is underpriced and I think it’s because uncertainty prevails over our growth, our dollar, China’s growth, Trump taxes and what Canberra creates. Of course, wage rises would also help but there are signs of these improving as our job market tightens.
Some economists are very positive on our economy, while others have a gradually-getting-stronger scenario in their forecasts.
Who’s right will be important for the contrarian players, who increase their exposure to local stocks because the bounce-back over time will have a big bearing on the annual return on investment. So, if someone opted for local over overseas investments, they could see a slow 2018 locally and it would mean they would’ve been wiser to listen to the experts.
For me, 2018 will be the contrarian’s pay-off year but it could start in this quarter. The likes of George Boubouras from Contango Asset Management, who’s a conservative kind of guy, foresees the S&P/ASX 200 seeing 6000 by mid-2018 and a number like 6300 by year’s end.
Let’s imagine he’s right, and he could be true to breed and be conservative with this call, then with the Index at 5814, we’re talking about an 8.3% gain before dividends and franking. That would be a nice contrarian return for one year, and if you can select better stocks exposed to a better growing Oz economy with a lower dollar, you could do even better.
My big call is when the conditions get right for our market to bust out of our trading range, the market’s climb to 6800 could surprise a lot of people who thought Australia was a slow coach not worth putting your money on.
I’ve learnt over the years to put your money on the quality performer. They don’t always win but they give you a good run for your money!
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