Professional Documents
Culture Documents
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.
Consensus predictions
Economy
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.
Jobs
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.
Rates
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).
Currency
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.
Cash
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.
Banks
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.
Europe
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.
Oil price
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.
Iron ore
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.
Gold
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:
8. Resources
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.
9. Property
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.