Top Macro Trends For 2015

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In This Week's Weekly Insights:

– Top Macro Trends For 2015
– Updating All-Weather Performers
– Woolworths: Vulnerable And In Focus
– Gaming: The Next Super-Trend?
– The Bull Market By Numbers
– Stakeholder Yield Remains Superior
– Rudi On TV: The Week Ahead

Top Macro Trends For 2015

By Rudi Filapek-Vandyck, Editor FNArena

It's that time of the year again. The time when strategists of all colours and experience start looking into their crystal balls to make predictions for the year ahead.

Given the share market's surprise performance to the downside this year, which virtually nobody predicted, it's probably best investors do not focus too much on the exact projections that will be published over the weeks ahead, in particular regarding the ASX200 and the Australian dollar.

My personal view has consistently been that 2014 was likely to deliver moderately positive returns, helped by dividends, and it appears -some five weeks out from the New Year- that will be the exact harvest of 2014. Yes, we can all have a good laugh about too many experts showing too much confidence one year ago in predicting the ASX200 would surely reach and even surpass the 6000 mark this year.

LOL.

At the end of the day, such predictions have little tangible value because returns are determined by individual stocks in investment portfolios. Those who own Aristocrat Leisure are probably walking around with a big smile, those owning too much of BHP Billiton and Rio Tinto are less likely to do so.

So best to ignore the exact forecasts, which require a lot of luck to prove accurate, and focus on the broader trends that await us in the year ahead. Within this context, I happily pass the baton to Goldman Sachs' strategists who, by the way, do not want to be reminded about their US$200/bbl forecast for WTI crude oil back in 2008. (In their defence: their mining team has been the most bearish on iron ore in Australia, and persistently held their stance while others denied or laughed, and see the results today).

Top Macro Trends For 2015, according to Goldman Sachs:

1. A Broadening Recovery
2. DM Divergence Lives On
3. The New Oil Order
4. Lowflation and the Fight Against It
5. The Dollar Bull Market
6. Fed: Later, Steeper, Further, Calmer
7. China’s Bumpy Downshift Continues
8. EM: More Relief, More Polarisation
9. The Low Vol World and its Challenges
10. Living in a Low Return World

Here's a quick run down for each of these key macro points:

1. A Broadening Recovery

The US economy is finally on better footing and Goldmans takes the view further improvement is to be expected in the years (multiple) ahead. Meanwhile, Europe should do a little better, so should Japan and so should Emerging Markets outside China. All in all, global growth should turn out a little better next year, without any bells, whistles or fireworks.

Risks remain, however. The risks Goldman Sachs strategists worry about most are a re-emergence of Euro area political tensions, a switch to a "deflationary mindset" in Germany, or a sharper downward shock from China's housing and credit imbalances. It is against these risks that portfolio protection may prove to be most useful, advise the strategists.

2. DM Divergence Lives On

The economic divergence between the US and other developed economies will translate into a divergence in central bank policies with the Fed ready to turn less accommodative but with ongoing stimulus measures in Europe, Japan and China. Goldmans expects the first Fed rate hike in September 2015.

Because of the modest growth and inflation prospects for most of other developed economies, US bond yields are expected to only moderately rise, while the US dollar is expected to strengthen further.

3. The New Oil Order

The underlying trend of commodities disinflation has further to run, predicts Goldman Sachs, and investors should expect lower oil prices, though no longer dramatically so given the significant falls that have already occurred. But oil is important and so too will be the consequences of a lower oil price.

Goldman Sachs sees a growth boost for oil importing countries and a genuine stimulus for disposable income for consumers worldwide, but those inside the industry and leveraged to high oil prices will have to pay the piper. Inflation is to remain low also because lower priced oil feeds further into the general theme of commodities disinflation.

4. Lowflation and the Fight Against It

Lowflation, disinflation and even deflation will continue to cause many a central banker serious headaches in 2015. Goldman Sachs predicts more of the same from central banks in Europe and in Japan, alongside a number of smaller peers. Wage inflation, even in a recovering US economy, is to remain benign.

Goldman Sachs believes central bank responses to undesirably low inflation will be a powerful force in financial markets.

5. The Dollar Bull Market

A continued strengthening for the US dollar is the number one prediction at Goldman Sachs for 2015, in particular against G10 currencies. This is a multi-year process unfolding, say the strategists.

6. Fed: Later, Steeper, Further, Calmer

Don't focus on the September target, say Goldman Sachs strategists. They expect the Fed to move later than what the market is expecting, because the risks of moving too soon are too high and there's no need to hurry because of low inflation. But once the Fed starts moving it will move quicker than the market's expectation and also higher, predict the strategists.

Goldman Sachs maintains the neutral rate sits at 4%. Their projections can thus be translated as: supportive at first, and for longer, but a shock awaits. All in all, Goldman Sachs believes a tightening Fed will flatten the uptrend for equities, not destroy it.

The unanswered question remains: when exactly will the public discourse shift from "tightening when" to "how high" as that will once again start up a period of increased volatility and re-adjustment.

7. China's Bumpy Downshift Continues

More of the same and for many years. That pretty much sums up Goldman Sachs' view on China. Behind present medium-term challenges is an economy with slowing potential growth, say the strategists, and this implies the upside potential is likely capped while risks to the downside remain.

All in all, GDP growth is expected to remain between 6% and 7% for years to come.

China's struggles are pretty much a guarantee for increased angst and volatility, argue the analysts. They suggest investors should welcome this as it will create opportunities.

8. EM: More Relief, More Polarisation

2015 will see more polarisation between Emerging Markets countries that have addressed their macroeconomic imbalances, and are on the right side of the oil import/export divide, and those that have not, states Goldman Sachs.

India and Turkey should do well, South Africa and Brazil not so. Falls in commodity prices are hurting the terms of trade of the latter countries and Goldman Sachs suggests significant further currency weakening is likely in both cases.

Lower commodity prices also have the potential to trigger severe credit issues in Venezuela, Ukraine, Argentina and even Russia, warn the strategists.

9. The Low-Vol World and its Challenges

The Great Moderation is to continue, predicts Goldman Sachs, with low liquidity but supportive fundamentals keeping overall volatility low in equity markets. There will be spikes in volatility, given economic vulnerabilities, but they will remain just that, spikes.

10. Living in a Low-Return World

Goldman Sachs notes most major assets are priced for low returns in the year ahead. Its own projections are for moderate returns, with the observation that equities continue to look more attractive than sovereign bonds and that FX will become more important as an active component of returns.

Multiples for equities are to remain above average and they might even rise further, say the strategists. They do not believe valuations are creating risk for larger sell-offs. Outside Japan and selected EM markets, they project moderate nominal returns.

Table below shows the key "exact" forecasts for 2015:

Note Goldman Sachs' projections for US equities imply a price return of about 3% and a total return of 5%, at higher volatility.

Updating All-Weather Performers

This will be my second last Weekly Insights for calendar 2014. Not only is Xmas approaching, and with it our annual break, but I still have to follow through on my promise to update on the theme of All-Weather Performers (see further below).

For this reason I shall publish the final Weekly Insights next Monday (Wednesday for non-paying subs) and use the time until Xmas to update my research and thoughts and to write and update the eBooklet that comes with a paid subscription.

Needless to say, All-Weather Stocks have been among the strongest performers in the share market post 2009 and I think the theme is to remain with us for longer.

Woolworths: Vulnerable And In Focus

At face value, the views of strategists at Morgan Stanley about Australia don't look too bad with their latest update suggesting Australia is now in year three of what is likely to prove a four year transition period post resources investments peaking in 2012.

As the transition enjoys a number of favourable offsets, including cheaper oil, strong housing investment, rebounding infrastructure investment, robust house prices and strong exports, Morgan Stanley sees solid, though below-trend economic growth on the horizon until mid-2016.

Below trend growth should go hand-in-hand with low inflation and thus with lower for longer interest rates so the overall context for the share market might not change too much from what we've seen thus far. Morgan Stanley recommends Global Leaders, yield beneficiaries and quality domestic stocks including Wesfarmers ((WES)), Lend Lease ((LLC)), Transurban ((TCL)), Goodman Group ((GMG)), Primary Healthcare ((PRY)), Virtus Health ((VRT)), Telstra ((TLS)) and TPG Telecom ((TPM)).

So far, so good. However, say the strategists, things really do not look good for companies overly reliant on consumer spending. Morgan Stanley predicts Christmas spending this year will turn out the worst since 2008. No wonder, the broker only has two Overweight ratings in the sector, Wesfarmers and Super Retail ((SUL)).

Morgan Stanley is in particular negative on developing dynamics in the supermarket sector, believing Aldi is now ready to really start hurting the incumbents and Woolworths' ((WOW)) supercharged profit margins (on top of the table when compared to both domestic and international peers) are about to be downsized.

The share market has started to pay attention too. Earlier this year Woolworths shares were trading on a foward PE of 18 and the implied dividend yield would regularly sink below 4% (thanks to a surging share price). Since that last disappointing sales report, however, investors are now taking the glass half empty approach. Woolworths shares traded above $38 in April, but this month they seem stuck near $31.

The de-rating that has taken place puts the PE on 15.5 and yield on 4.6% which seems a lot better than 18 and less than 4%, but investors should not lose sight of the fact that if Woolworths' margins now come under pressure while sales growth appears without oomph, the ensuing de-rating will go a lot further still.

This does not by default mean Woolworths shares are going back to sub-$30 price levels.

The last time the shares underwent a multi-year de-rating process, post-GFC until early 2012, the share price moved sideways in the low to mid-$20s.

Below is a chart I used to show on a regular basis in those years. It shows the PE de-rating (blue line, left hand side) and the share price (red line, right hand side) until 2012 when the share price finally broke loose from the anchor that had been a long and extended PE de-rating. As said, the PE went all the way back up, from 14.5 in 2011 to above 18 this year.

Whether the 15.5x holds in the months ahead (supported by 4.6% yield, fully franked) will now depend on the next sales update and the interim result in February.

Gaming: The Next Super-Trend?

One might be forgiven for thinking the Australian share market is all about yield and healthcare stocks but in the shadows of both, gaming stocks are experiencing some kind of a revival.

Personally, I have little appetite for playing a sector that has the same scruples as the tobacco industry (e.i. none), but since the share market is about making money, with or without such moral considerations, I also see it as my task to point out these trends, regardless.

Consider, for instance, the two best performing stocks in the sector in Australia have since the start of August risen no less than 49% (Aristocrat Leisure ((ALL)) and 46% (Echo Entertainment ((EGP)). Offsetting this is the performance of two prior high-flyers in the sector, Ainsworth Gaming ((AGI)) and Crown Resorts ((CWN)), which respectively lost their shareholders 42% and 19% over the same period.

Against the background of all this, stockbrokers and investment bankers internationally are issuing in-depth studies and projections how this industry should be looking towards a solid, supportive undercurrent in the decade ahead. It's like a new super-trend nobody wants to talk about as yet in the public arena.

So where's this newfound optimism coming from?

Pillar number one is the shift to online and to fixed odds betting which, for the right companies with the right strategies, is expected to feed into higher margins and accelerated growth. Pillar number two is the development of Asia as the new growth engine for the industry and for casinos in general. Pillar number three are more investments and higher margins for casino operators worldwide. Pillar number four is another leg of consolidation happening.

Underpinning all these trends are key assumptions that Asians are only getting richer and richer, and they do like to enjoy and relax while playing the odds, and the observation that a large chunk of the global spending on "gaming" ("gambling" is the more accurate term) might as well be considered non-discretionary, given its reliable recurrences.

Morgan Stanley, the latest to issue a proprietary sector study, believes the best opportunity on this side of the globe rests with Sky City ((SKC)) whose casino returns following investments in Auckland and in Adelaide are about to become best-in-class, the analysts predict. Other still favourable options are Tabcorp ((TAB)) and James Packer's Crown Resorts, find the analysts.

Of course, the latter is currently suffering from disappointing growth numbers in Macau but if we can rely on Citi analysts keeping a close eye on developments over there, growth should resume in 2015 on the back of additional hotel rooms becoming available.

Morgan Stanley doesn't like Tatts ((TTS)) and Echo and on my personal observation that's pretty much how everybody thinks about those two as well.

The Bull Market By Numbers

It's a bull market, but somebody forgot to tell investors in Australia with main indices now having dropped into negative territory (ex-dividends) for calendar year 2014.

Christopher Joye, in the AFR's Smart Money over the weekend, put together a few more stats and numbers that, combined, illustrate just how erratic the Australian equity market's performance has been in the post-2008 aftermath.

"The equity market's total 7.5 per cent annual return after fees over the past decade appears enticing. Yet you had to contend with gross capital losses of 1 per cent this year, 15 per cent in 2011, 1 per cent in 2010 and 43 per cent in 2008. And most returns over this period were earned before the global financial crisis.

"Since January 2007, your annual net return would have been 2.5 per cent, or below the average Reserve Bank of Australia cash rate."

Stakeholder Yield Remains Superior

Research conducted both locally as well as overseas suggests stocks from companies buying in their own shares more often than not outperform peers who don't. However, a recent quant research report from Macquarie suggests investors shouldn't narrow their focus to buy-backs only.

Macquarie analysts developed the concept of "Stakeholder Yield" which covers companies ability to reward stakeholders outside the business from the cash generated inside the business. This concept covers share buy-backs, of course, but also higher dividends and paying down debt. Macquarie's research builds a strong case that companies that combine all three strategies to reward shareholders, simply deliver superior returns for their shareholders.

Investors, wherever you are, take note.

FNArena's regular update on share buy-backs:

Ansell ((ANN))
Aurizon ((AZJ))
Aveo Group ((AOG))
Cape Lambert Resources ((CFE))
China Magnesium Corp ((CMC))
CSL ((CSL))
Dexus Property ((DXS))
Donaco International ((DNA))
Fiducian Portfolio Services ((FPS))
Helloworld ((HLO))
Hills ((HIL))
Karoon Gas ((KAR))
Logicamms ((LCM))
SMS Management & Technology ((SMX))
Telstra ((TLS))

Companies believed to potentially announce buy backs in the not too distant future:

BHP Billiton ((BHP))
Rio Tinto ((RIO))

We continue to welcome your participation/contributions. Send them to info@fnarena.com

Rudi On TV: The Week Ahead

On request from readers and subscribers, here are my scheduled TV appearances for the seven days ahead:

– Wednesday – Sky Business, Market Moves – 5.30-6pm
– Thursday – Sky Business, Lunch Money – noon-12.45pm
– Thursday – final appearance on Switzer TV for 2014, Sky Business – between 7-8pm

(This story was written on Monday, 24 November 2014. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website)

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Things might look a lot different today than they have between 2008-2012, but that doesn't mean there are no lessons and conclusions to be drawn for the years ahead. "Making Risk Your Friend. Finding All-Weather Performers", was published in January last year and identifies three categories of stocks that should be part of every long term portfolio; sustainable yield, All-Weather Performers and Sweetspot Stocks.

This eBooklet is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of October available. Just send an email to the address above if you are interested.

Click to view our Glossary of Financial Terms