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Four things that could surprise investors in 2015
Max Mason
Published: January 21, 2015 - 1:46PM
Surprise is rarely a word investors like to hear, so with 2015 well and truly under way Credit Suisse has outlined four events which, although not expected, could hit portfolios this year.
The Australian economy is struggling to transition away from mining investment, but the federal government remains determined to remain on the road to austerity rather than stimulate growth.
The first surprise, outlined by Credit Suisse analysts Hasan Tevfik and Damien Boey, could be the government reversing this trend. The cost of financing is at its lowest on record and Australia's gross debt to GDP level of around 30 per cent is the second lowest among developed markets, Mr Tevfik and Mr Boey said.
Raising debt levels to 50 per cent "would add 20 per cent to the current GDP over a number of years", the analysts said.
"Should the government embark on material deficit spending, there would be less need for the RBA to cut rates. Bonds and bond proxies in the equity market will struggle. Also, higher bond yields will undermine the current attractiveness of the de-equitisation trade," Mr Tevfik and Mr Boey said.
"We imagine, at the margin, companies will be more likely to raise financings in the equity market rather than the bond market. Infrastructure stocks like Downer and Lend Lease will likely benefit from additional government spend. Meanwhile, other domestic cyclicals such as the retailers, transport companies and media companies should do well as economic recovery takes hold."
The second surprise identified could be a waning interest in Australia's property market from foreign investors. While Mr Tevfik and Mr Boey said they actually expected demand to grow, it is possible that a shift in demand to a different country or a government clamp down on cash leaving countries such as China could see momentum fall.
"The obvious stocks to suffer will be those most exposed to the domestic house market like the building material companies, residential developers like Mirvac , property website like REA and Fairfax and, if house prices decline materially, the major banks," the analysts said.
"Weaker residential activity will probably propel the RBA to cut rates even more than currently expected so could be positive for those stocks which are sensitive to interest rate cuts but less exposed to housing like the high yielding REITs and insurers."
A third surprise could be a shift in portfolio positions among self-managed super funds into international equities as investors search for stronger growth. As of late last year, SMSFs had just 1.5 per cent allocated to international equities, while holding over 40 per cent in the domestic market.
"At the moment, we expect Selfies (SMSFs) to be net buyers of $1 billion of Aussie equities per month. If this demand goes elsewhere then a major support for the dividend trade in Australia will become less important," Mr Tevfik and Mr Boey said.
"Also, the core positions for Selfies – we believe they are the four big banks and Telstra – will probably suffer the most and a lack of Selfie demand may even undermine the banks efforts to re-capitalise their balance sheets post the Financial System Inquiry."
Finally, a significant ramp up in spending from Australian businesses could surprise investors this year. Should companies in the ASX200, ex-financials, increase capital expenditure to 14 per cent of free cash flow, which is the level seen in 2012, spare cash is expected to be around $18 billion, rather than the $60 billion forecast.
"While the pick-up in capex maybe be positive for Australian economic activity and job creation, at least in the short term, it will be negative for shareholders as these investment will be made at the expense of capital returns. Our previous work suggests we should also expect a decrease in returns on invested capital. Stock prices will struggle in this scenario".
This story was found at: http://www.smh.com.au/business/mark...rprise-investors-in-2015-20150121-12uwef.html
Max Mason
Published: January 21, 2015 - 1:46PM
Surprise is rarely a word investors like to hear, so with 2015 well and truly under way Credit Suisse has outlined four events which, although not expected, could hit portfolios this year.
The Australian economy is struggling to transition away from mining investment, but the federal government remains determined to remain on the road to austerity rather than stimulate growth.
The first surprise, outlined by Credit Suisse analysts Hasan Tevfik and Damien Boey, could be the government reversing this trend. The cost of financing is at its lowest on record and Australia's gross debt to GDP level of around 30 per cent is the second lowest among developed markets, Mr Tevfik and Mr Boey said.
Raising debt levels to 50 per cent "would add 20 per cent to the current GDP over a number of years", the analysts said.
"Should the government embark on material deficit spending, there would be less need for the RBA to cut rates. Bonds and bond proxies in the equity market will struggle. Also, higher bond yields will undermine the current attractiveness of the de-equitisation trade," Mr Tevfik and Mr Boey said.
"We imagine, at the margin, companies will be more likely to raise financings in the equity market rather than the bond market. Infrastructure stocks like Downer and Lend Lease will likely benefit from additional government spend. Meanwhile, other domestic cyclicals such as the retailers, transport companies and media companies should do well as economic recovery takes hold."
The second surprise identified could be a waning interest in Australia's property market from foreign investors. While Mr Tevfik and Mr Boey said they actually expected demand to grow, it is possible that a shift in demand to a different country or a government clamp down on cash leaving countries such as China could see momentum fall.
"The obvious stocks to suffer will be those most exposed to the domestic house market like the building material companies, residential developers like Mirvac , property website like REA and Fairfax and, if house prices decline materially, the major banks," the analysts said.
"Weaker residential activity will probably propel the RBA to cut rates even more than currently expected so could be positive for those stocks which are sensitive to interest rate cuts but less exposed to housing like the high yielding REITs and insurers."
A third surprise could be a shift in portfolio positions among self-managed super funds into international equities as investors search for stronger growth. As of late last year, SMSFs had just 1.5 per cent allocated to international equities, while holding over 40 per cent in the domestic market.
"At the moment, we expect Selfies (SMSFs) to be net buyers of $1 billion of Aussie equities per month. If this demand goes elsewhere then a major support for the dividend trade in Australia will become less important," Mr Tevfik and Mr Boey said.
"Also, the core positions for Selfies – we believe they are the four big banks and Telstra – will probably suffer the most and a lack of Selfie demand may even undermine the banks efforts to re-capitalise their balance sheets post the Financial System Inquiry."
Finally, a significant ramp up in spending from Australian businesses could surprise investors this year. Should companies in the ASX200, ex-financials, increase capital expenditure to 14 per cent of free cash flow, which is the level seen in 2012, spare cash is expected to be around $18 billion, rather than the $60 billion forecast.
"While the pick-up in capex maybe be positive for Australian economic activity and job creation, at least in the short term, it will be negative for shareholders as these investment will be made at the expense of capital returns. Our previous work suggests we should also expect a decrease in returns on invested capital. Stock prices will struggle in this scenario".
This story was found at: http://www.smh.com.au/business/mark...rprise-investors-in-2015-20150121-12uwef.html
