One thing I always shirk at is writing outlooks for the “year ahead” at the end of a given year! But here goes…
In investing, there is no “full time siren” and the change of calendar year broadly means nothing. It’s not as though any of us wake up on the 1st of January and decide we need a completely different investment strategy for the New Year.
For some professional investors the new calendar year brings a “clean sheet” in terms of performance and performance fees, yet that again doesn’t mean you change your investment process.
What I am trying to start by saying is the roll-over to a new year is broadly meaningless in terms of investing and it can be dangerous to believe anything changes simply because we tick over into another calendar year.
The basics of sensible equity investing never change: buy good companies and hold them. That is timeless advice.
My other piece of advice is NEVER compare equities to property, fixed interest or cash. They are completely different asset classes with completely different characteristics.
Equities always have and always will have more short-term volatility than property (and cash). You get compensated for that higher volatility by higher grossed up dividend income and capital growth in the right growth equities. You also get compensated in terms of significantly higher liquidity in equities, with the ASX moving to T+2 settlement in a year or so. My point is you have to be able to cope with short-term volatility to be a successful equity investor.
2015 has been a year of very high hourly, daily, and weekly volatility in domestic and global equities. This has been driven by uncertainty about central bank policy and concerns about the real growth rate of the Chinese economy. Interestingly though, earnings growth has been acceptable in equities and the M&A cycle has been enormous.
In 2016 I actually forecast volatility to drop a little, but particularly in Australian equities as it becomes more evident the Australian economy is slowly improving and the mega cap capital raising cycle has ended.
I actually think the most surprising story of 2016 might just be Australian GDP growth, Australian employment growth and Australian retail sales surprising on the upside, despite weak commodity prices.
This trend has already started since the change of Prime Minister to the popular leader Malcolm Turnbull. Whatever your politics, you can’t argue with the economic data which has universally turned UP since Turnbull took over as “Australian CEO”.
The most important point is Australia has created 98,000 jobs in the last 3 months and the unemployment rate has dropped to 5.8%. This is undeniably good news and I am with RBA Governor Stevens in believing the data is real. Remember, mining is a small employer in Australia, the three biggest employers remain retail, healthcare and financial services. Tourism is also adding jobs.
Job creation is translating to improved retails sales and I expect to see strong Xmas retail sales growth reported in mid-January. Remember, the biggest variable in retail spending is employment and employment is strong.
Similarly, the true “wealth effect” in Australia is driven by property prices, not equity prices. While it’s been a poor year for Australian equities, it’s been another stellar year for Australian residential property. This should also help drive confidence and spending.
Employment growth and population growth, when combined with the lowest interest rates in modern Australian history, should continue to underpin the resident property market. I don’t forecast another year of huge property price gains in Australia in 2016, but I certainly don’t predict a property price crash either.
Yes, the property supply response is arriving in apartments etc, but I continue to believe demand will be there to meet it. For property prices to truly crash you need a big jump in unemployment. The inability to service your mortgage is what triggers a broader property crash, and I simply think unemployment is coming down in Australia, not going up. In fact, I believe the unemployment rate has peaked.
I suspect median Australian residential property prices will be flat in 2016 and that large cap Australian industrial equities will deliver a better total return than residential property in the year ahead.
As I have written before, the large cap Australian equity market has had the “kitchen sink” of negativity thrown at it in the 2H of 2015, culminating in BHP having a damn collapse.
I find it difficult to believe the same “kitchen sink” of negativity can be thrown at large cap Australian equities in 2016, remembering the ASX Twenty Leaders index (XTL) represents around 70% of the benchmark ASX200 Index. So go large caps, so go the index.
In 2015 we had a commodity complex collapse which wiped out BHP, RIO and large cap energy names. We had equity raisings from all four major banks. We had multiple profit warnings from Woolworths. Suncorp (SUN) had a profit warning, while QBE disappointed. Telstra fell $1.00 for no apparent reason other than perhaps it was sold to fund taking up bank equity raisings. I could go on, but my point is-could this possibly be as bad and widespread in 2016.
My personal view is NO. In 20 years I have NEVER seen so much go wrong at once in large cap Australia. It was almost like there was nowhere to hide but Macquarie Group (MQG), Westfield, CSL (CSL) and Transurban (TCL)!!
I find it improbable this will be the case in 2016 and I tend to think large cap Australian household names such as the banks and Telstra will deliver solid total returns in 2016. As you know, I also think BHP is now value and has all the characteristics of WES, TLS and QAN at the bottom. Patience may well be required in BHP but I think it’s now cheap.
In terms of Australia, I believe the combination of value in large cap equities and recovering economic growth, when overlayed by ultra-low interest rates, will drive solid total returns in the right Australian equities.
The missing ingredient remains “animal spirits” around board tables. However, as soon as night follows day capex/corporate spending will follow consumer and market confidence.
In terms of the rest of the world I continue to see economic growth in the USA, Eurozone, UK, China and Japan. The world’s economies are growing, albeit slowly with very little inflation, and that is a point worth remembering when the bears are shouting on the down days.
I also expect central banks to remain very, very accommodative. While the Fed has finally started the interest rate normalisation path, you can be certain they will raise rates very gently and slowly in the USA, while the rest of the world will continue to cut rates or hold at record lows.
Under that central bank overlay, dips in equities will be supported and I stand with the great Peter Switzer in his “buying the dips” approach to global and domestic equities.
Don’t get me wrong, there will ALWAYS BE DIPS driven by one scare or another. However, with central banks remaining EXTREMELY accommodative, those dips will be dips, rather than the start of a new bear market.
So, I’m broadly optimistic about 2016 and particularly optimistic about Australian and large cap Australian equities after an “annus horribilis” in 2015.
Remember, it’s always darkest before the dawn and it’s been pitch black in large cap Australian equities in the 2nd half of 2015.
As always, in all of investing we need to monitor situations as they occur. We are all having a shot at what the future holds and none of us have a true crystal ball. We need to be willing to change our view if it appears our view is wrong.
The single best thing you can do is buy great companies at fair, or even cheap prices. If you do that in 2016, I’d be pretty sure the year will treat your portfolio well.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
