After a year in which it seemed that risk was everywhere, Australian investors are probably feeling just a little more comfortable. The sharemarket lived up to the adage that markets “climb a wall of worry,” ending the year – after a shaky start – up almost 15 per cent, and closer to 20 per cent once dividends are included.
Surveying 2013, Shane Oliver, head of investment strategy and chief economist at AMP Capital, sees several key themes. He predicts:
• Continuing fiscal austerity, but moderating in Europe and picking up in the US;
• Ultra-easy global monetary conditions with open-ended quantitative easing in the US, Japan effectively doing the same, more monetary easing in Europe and very low interest rates in Australia;
• Diminishing risks of a Euro break-up and a further fading of the Euro-zone financial crisis, largely thanks to European Central Bank (ECB), action but also ongoing support for peripheral countries;
• Global growth of about 3.25 per cent – up from around 3 per cent in 2012 – led by an improvement in the US and China; and
• Continued low inflation, thanks to spare global capacity.
On this basis, Oliver sees occasional bouts of market volatility but against a rising trend for share markets as global growth improves helped by reasonable valuations, easy monetary conditions and a likely swing in investor flows from “safety” to focussing a bit more on “growth”.
Michael McCarthy, chief market strategist at CMC Markets, says Australian investors are likely to remain cautious in 2013, and focused on investment basics. “Dividend yields will be top of investors’ minds and with interest rates close to zero we expect to see a continued shift in investor thinking away from capital protection and safe havens towards real returns. This is essentially a re-balancing of the risk to reward equation.”
McCarthy says dividend yields on stocks are very attractive when compared to term deposit rates, which have fallen steadily since 2008 – a drop of almost one-third, from an average of 6.5 per cent to an average of 4.5 per cent. “Where investors can have reasonable comfort that the revenue streams supporting the dividend yields are sustainable, they can hold the stocks with some degree of confidence, and any capital gain is a bonus.”
On that basis, he says, investors can still look at Telstra and the big four banks. “ANZ at $26.03 gives me an historical yield of 5.9 per cent, which is a grossed-up yield of 8.4 per cent. CBA at $63.50 is yielding 5.4 per cent nominal, or 7.7 per cent with franking. NAB at $27.20 is 6.7 per cent nominal and 9.6 per cent with franking. Westpac at $27.50 is on 6.1 per cent nominal. 8.6 per cent with franking.
“And then Telstra, for comparison, at $4.60, is on 6.1 per cent nominal, and 8.6 per cent with franking. They’re great yield situations, and of course they’re even better for self-managed super fund (SMSF) investors (where the refund of franking credits augments the nominal yields even further.)”
Although these are defensive stock positions, McCarthy says there will probably be capital gain as a bonus. For those keen to move from a defensive to a growth footing, he says the big global miners – BHP and Rio Tinto, with their diversified global portfolios of commodities – will give that exposure.”
Energy is also on McCarthy’s radar. “I think that’s under-priced at the moment, I suspect here are good opportunities there, particularly for low-cost gas producers like Woodside and OilSearch. The other sector I like is media, because it is double-leveraged to growth, in that a lot of their business is going online, which means low incremental cost of production – and you’ve also got potential for an upward swing in the advertising market this year as consumers gain in confidence.
“Don’t forget that there is a federal election in 2013, not just the campaign, but all of the government advertising that comes before an election, is usually a big boost to the advertising market,” says McCarthy.
In the media sector, McCarthy likes Seven West Media and News Corporation – although he needs to see a “pullback” in News’ share price. Seven West Media owns Seven Television, Pacific Magazines, the Yahoo!7 internet platform, the West Australian and associated WA regional newspapers, and radio stations.
“I think Seven West is a standout in the sector. News Corp has a great stable of assets globally, particularly its movies division (20th Century Fox) and its cable television businesses (including Fox in the US and BSkyB in the UK), but the stock has doubled in price since August 2012, which make it hard to get involved at the moment. But if there is any significant pullback, News is a stock that I would be looking at.
“I know that a lot of the traders are looking at Ten Network, because they believe if there is a recovery and Ten also has a strategic turnaround, you get double leverage again. But that’s a high-risk, high-reward situation,” says McCarthy.
Allan Furlong, manager of private client services at Joseph Palmer & Sons, agrees that most of the money coming into the market is going into the “defensive stuff,” that is, the banks, Telstra, Woolworths and Wesfarmers, looking for the comfort of yield. “There isn't conviction yet that we are into the growth stage, let alone a bull market.
“We don’t want to stay in those defensive areas: we’re telling clients to position themselves in some of the global stocks that have good growth prospects on the back of the recovery we expect in the US economy – the likes of Brambles, Toll, CSL, Computershare.”
Furlong also expects BHP and Rio Tinto to continue to do well. “I think there is a disconnect between the share prices and the actual businesses. BHP and Rio are still going to perform strongly as businesses, irrespective of whether the resources boom moderates; in fact, it already has, but they’re well-positioned, because they are so diverse.
“They might have blown up a bit of money – particularly Rio – but these are still very powerful balance sheets. BHP is the same. The story for the mining boom might be over, but I don’t think the story is over for BHP and Rio. There is still growth in those stocks,” says Furlong.
Martin Pretty, head of research at Investorfirst, says there are “very limited areas of the market” where investors can expect to get reliable growth in any industry. “The only one I can really see at the moment is consumer credit, which is not the banks, but the guys who service people below that; and maybe online penetration. It is a very stock-specific market, where you want businesses that are going to grow despite the fact that Australian industry overall is not going to grow at a great rate.”
Pretty says the Australian employment rate data is hiding under-employment – people who have left the workforce, a declining participation rate. “We haven't seen the true impact of that yet, but I suspect that’s going to hinder growth for industries overall this year. But we like a couple of stocks in the consumer credit space.
“The first is Money 3, a diversified finance company that has car loans making up two thirds of its $20 million loan book. It focuses on profitable niches in the finance sector rather than marketing a full suite of financial products. The second is Collection House, which buys credit card debt from banks and debt books from auto finance, non-bank consumer lenders and utilities.”
Wealth management is another sector that Pretty says offers some attractive opportunities, as investor confidence improves. “Super statements are back in the black, people are feeling a bit better, the wealth management companies are telling us they are getting very big flows in now, every week – as that risk money comes back in. It makes sense, because you're not going to see interest rates go up for a long time, so where does the money go?”
Pretty nominates Perpetual, Equity Trustees and WHK (which has a scrip bid on the table from Snowball Financial) as examples of wealth management companies that could benefit.
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