INVESTMENT OUTLOOK 2020 - Switzer Super Report
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Introduction INVESTMENT OUTLOOK
INVESTMENT
THE KEY REPORT FOR INVESTING IN
2020 WITH INSIGHTS & ARTICLES FROM
THE INDUSTRY’S LEADING EXPERTS.
OUTLOOK 2020
INVESTMENT OUTLOOK Introduction
contents
1. A YEAR IN REVIEW 5. THE KEY TO STOCKS
By Michael McCarthy IN 2020
By Vihari Ross
2. HOW TO PLAY THE 6. OUTLOOK FOR EQUITIES
SHAREMARKET IN 2020 IN 2020
By Paul Rickard By Charlie Aitken
3. 3 LARGE CAP STOCKS 7. WILL PROPERTY COME
TO CONSIDER IN 2020 ROARING BACK IN 2020?
By Tony Featherstone By Margaret Lomas
4. MY TIPS FOR 2020 8. MY FIVE TOP STOCK TIPS
By Julia Lee FOR 2020
By James Dunn
IMPORTANT: THE CONTENT IN THIS EBOOK 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 REGARD TO YOUR CIRCUMSTANCES.
1. MY TIPS FOR 2020 1. MY 5 TOP STOCK
By Julia Lee PICKS FOR 2020
By James Dunn
Introduction INVESTMENT OUTLOOK
“THANK
YOU FOR
ANOTHER
SUCCESSFUL
YEAR...”
In this ebook, a few of my esteemed first year of a US Presidency is often
colleagues have shared their the worst for stocks.
thoughts on investing in 2020 and
their look at specific investments, I believe the progress on a US-China
as per usual, are enlightening and if trade deal and the UK election that
history is any guide, these experts should make Brexit happen with less
will be giving us great leg ups to hitches, should be good for business
make money next year. investment, economic growth,
company profits and stock prices.
As they have zoomed their market-
sensitive grey matter on to the small I’m happy to be long stocks until
pictures of what you might want to at least March or April but I expect
invest in, let me pull out my crystal some volatile times as the US
ball and give you my big picture for election campaign gets nasty. And
investing in 2020. May to October is often a tough time
for stocks.
I’m ruling out a black swan that could
unexpectedly sail into view and ruin That said I think our stock market will
stock markets and economies. That be up about 10% next year, so let’s
said, I could be more worried about keep our fingers crossed that I’m on
these feathered friends in 2021 — the the money, like I was last year.
WARMEST REGARDS,TITLE
Peter Switzer
INVESTMENT OUTLOOK Michael McCarthy
a year in review
BY MICHAEL MCCARTHY CHIEF MARKET STRATEGIST, CMC MARKETS
Global sentiment fluctuated between firmed, and the US 10-year bond yield
confidence and concern, and started a decline that saw it almost
markets swung with the shifts. The halve.
interplay of unconventional monetary
policy and an extraordinary global The first half of calendar 2019
political landscape drove markets brought support for all asset prices,
in unexpected ways. Any preview and especially growth exposures.
of the year to come starts with an The second half was trickier.
acknowledgement of the current
state of play. After significant interest rate
reductions around the world, central
At the beginning of the year share banks went to “wait and see.”
markets were under extreme pressure This meant every growth-related
as tightening monetary conditions economic release, from GDP to
and trade disputes imperilled growth, company earnings reports, had
and investor sentiment. Crude oil traders speculating about the impact
and copper prices languished at two- on valuations versus potential central
year lows. The US 10-year bond yield bank responses.
sat at 2.8%. Both institutional and
individual investor cash balances Predicting market reactions to
were high. news became doubly hard. Would
investors respond to a weaker China
The big shift came in January. In GDP release or non-farm payrolls
globally co-ordinated actions, central number by selling shares because
banks shifted their stance from of the negative impact on profits, or
tightening/neutral to neutral/easing. would they buy shares in anticipation
Market reactions sparked a massive that the People’s Bank of China and
influx of cash. Share markets rose, the US Federal Reserve would leap to
both industrial and precious metals the rescue?
Yet as the end of the year approaches,
share markets are higher by double-
Life
digit percentages. Many hit all- The Switzer team counts down their top 10
time highs in the fourth quarter. shows & movies for you to catch up on:
Unexpected discipline from the OPEC
plus cartel lifted oil prices more than 1. Total Control 6. Peaky Blinders
50% from their lows, and gold hit six- A fearless Indigenous senator, just The series is set in Birmingham,
England, and follows the exploits
weeks into her political career, finds
year highs. herself betrayed at the highest level. of the Shelby crime family in the
Seeking redemption, she sets out aftermath of World War I. The
to settle a score against the party, fictional gang is based on the Peaky
The outlook for shares is dimming. and the Prime Minister of Australia. Blinders, a real 19th century urban
youth gang.
(Available on ABC iView)
The positive outlook due to easier (Available on Netflix)
monetary conditions is offset by 2. The Loudest Voice 7. Unbelievable
high share prices and stretched American drama television mini- Based on a true story & starring Toni
valuations. Unpredictable investor series depicting Roger Ailes as he Collette, when an orphaned teen
reports being raped, then recants her
creates and guides the rise of Fox
reactions to news as they second- News. Russell Crowe stars as Roger story, two female detectives follow
Ailes in one of his best roles yet. evidence that could reveal the truth.
guess policy responses adds to the (Available on Stan) (Available on Netflix)
difficulties.
3. Ray Donovan 8. Jack Ryan
“stocks will Ray Donovan works as a mediator
for a law firm that handles celebrities
and wealthy clients. While Ray is
an expert in solving other people’s
From Tom Clancy’s book series,
the show centres around former
US marine Ryan, on his path to
becoming a CIA analyst when he’s
launched into a dangerous field
trade largely
problems, he has no control over his
personal issues. assignment.
(Available on Stan) (Available on Amazon Prime)
4. Succession 9. The Morning Wars
sideways with
The Logan family is known for The Morning Wars depicts a behind-
controlling the biggest media and the-scenes look into the world of
entertainment company in the world morning television. Amongst the
(some say the plot is based on the sex scandals & politics, Jennifer
Murdoch family) but their world Anniston’s character fights to retain
her job as the top news anchor.
an upward
changes when their father steps
down from the company. (Available on Amazon Prime)
(Available on Fox Showcase)
5. The Crown 10. Den of Thieves
When an elite unit of the LA Sheriff’s
bias.”
This drama chronicles the life of
Queen Elizabeth II from the 1940s Department face off with a gang of
to modern times. Plus the intrigues, ex-military-turned-criminals, things
love lives and machinations behind are sure to get explosive. Especially
the great events that shaped the when they try to rob the Federal
second half of the 20th century. Reserve Bank.
(Available on Netflix) (Available on Netflix)
A higher probability outcome for
2020 is that stocks will trade largely
sideways with an upward bias.
However, the path could be even Life
rockier than 2019, with large swings In case you’re on the road this summer, here are some of the
on the cards. Doubting the extremes best podcasts we’ve heard this year too :
of sentiment worked well in 2019,
and could outperform in the coming 1. The Dropout 4. The Daily
year. Active investors may consider Thrilling tale of Elizabeth From the New York
Holmes, the 19 year old Times, The Daily takes a
selling when conditions look terrific, who started Theranos - a deep-dive into an issue
and buying when conditions seem blood testing company
that the likes of Warren
that’s prevalent in the
daily news. It’s a great
terrifying. Buffett & Henry Kissinger snapshot into current
invested heavily in. Only to affairs & the context
discover it was all a scam. behind the headlines.
An important potential change
in stocks in 2020 is a shift in the
2. Unravel 5. On Being
favoured investment style. In 2019, An Australian true crime Through interviews with
global investors chased growth at podcast, bringing you a writers, philosphers,
different story to unravel poets, astrophysicists
almost any price, driving stocks like each season. The most - this podcast is an
Alphabet and Amazon to record recent is the story of
missing person, Belinda
enlightening discussion
on what it is to be human
levels, and supporting Initial Public Peisley, who was last & what it is to live in the
seen in Katoomba 1998. human condition.
Offerings from profitless companies
like Uber. This is a fun party game,
but the music may stop in 2020. In 3. Interview 6. Who the hell
a fraught environment, investors find This podcast is Hamish?
buying stocks with lower share prices accompanies the show,
where Andrew Denton
A gripping tale of an
Australian conman who
more attractive and 2020 could be has honest and raw duped victims in the US,
conversations with a
the year where value investing roars variety of public figures,
Canada, Britain, Hong
Kong & Australia out of
back into style. celebrities & writers. millions. The story tracks
each deceitful encounter
and ends with his fateful
demise.
INVESTMENT OUTLOOK Paul Rickard
how to play the australian
stockmarket in 2020
BY PAUL RICKARD DIRECTOR, SWITZER FINANCIAL GROUP
2019 was an exceptional year for due to the unpredictability of the that interest rates are going to stay
stocks at home and abroad, with both President seems prudent. A big drop low – very low – for some time.
the Aussie and US markets hitting all- if he can’t pull off an acceptable trade Ultra-low interest rates are a function
time highs. It was also the 11th year deal, probably a smaller rise if he can of low economic growth and lack
of the current bull market – one of get it done. of pricing power by businesses,
the longest on records. the latter mainly due to disruption
So it is hard not to approach 2020
without some degree of trepidation,
“it is hard by technology, and I can’t see this
changing in 2020.
not to
more so because the outlook seems In fact the cheer squad is already
to come down to the actions of the calling for RBA Governor Dr Phillip
erratic and unpredictable President Lowe to cut the cash rate by a further
Donald Trump. If the trade war 0.25% in February. Some are saying
between the two largest economies,
China and the USA, continues or
escalates again, that has to be bad
approach that it will hit 0.25% by June, and
then the RBA will embark on “non-
traditional” methods.
2020 without
for stocks. And if the US market
sinks, the Aussie market will follow I hope that employment holds firm
and probably fall further. and that the RBA doesn’t cut the
cash rate, because I fear that these
Conversely, a positive trade outcome
will be supportive for the market.
It may not propel the market that
some cuts will do more harm than good
by hitting consumer confidence.
However, I do sense that they will
degree of
much higher as this is the “expected” bow to the pressure again. This
outcome, but it will at least remove means that “expensive defensive”
the biggest negative overhanging it. stocks such as Transurban, Sydney
Airport and the A-REITs are set to
We know that President Trump is very
attuned to the market and that facing
an election in November, he will want
trepidation.” become even more expensive as
investors chase secure yield. The
Aussie dollar will also remain under
a strong economy, high consumer The odds do, however, favour a deal downward pressure.
confidence, low interest rates and full so its not time to quit the market.
employment. The absolute last thing Also, the “trend is your friend” and Another trend that is likely to continue
he wants is a stockmarket in retreat. despite the tenure of the bull market, in 2020 is that the quality stocks with
the direction is still firmly up. both top and bottom line growth
From a risk/reward point of view, will get even more expensive. With
taking a more defensive orientation More confidently, we can assume so many of the major companies
seemingly “growthless”, there is a
Paul Rickard INVESTMENT OUTLOOK
paucity of companies of the calibre ) total return of 26.1% and is mainly
of CSL, Ramsay, REA or Seek. These due to the performance of the major
stocks are going to stay in very high banks and insurance companies.
demand.
Small caps, as evidenced by the
Summing this up a strategic level: Small Ordinaries index which
• I am not taking money off the table tracks stocks ranked 101st to
yet, but I am also not putting any 300th by market capitalization,
more money into stocks; also underperformed with a return
• I am keeping the “expensive of 21.7%. This index tends to be
defensives” for my yield portion; overweight resource companies and
• I am hanging on to quality stocks is the second consecutive year of
which have genuine top-line growth underperformance.
– and will look to increase these
weightings if the opportunity arises; Larger mid-caps, stocks ranked
and between 21st and 50th by market
• Stocks with overseas earnings will capitalization, outperformed in 2019.
benefit from the downward pressure
on the Aussie dollar. Now let’s look at Mean reversion, that is the tendency
the composition of the portfolio by for prices and returns to revert to the
company size and industry sector. long-run average level of the entire
dataset, is always something to
consider when making assessments
large caps or small caps? on how markets may perform. I can’t
In 2019, both big and small cap stocks see much in this data to help one way
have moderately underperformed or the other. I do, however feel that in
compared to the overall market. As an environment of lower growth and
the table (next page) shows, the top softer commodity prices, small caps
20 stocks, which make up about 45% may struggle.
of the total market capitalization,
have returned (on a total return basis Further, I think the big banks could do
including dividends) 23.4%. On a a little better so my inclination is to
relative basis, this is 2.7% worse than maintain a bias towards larger cap
the broader market’s (S&P/ASX 200 stocks.
INVESTMENT OUTLOOK Paul Rickard
index returns
2019* 2018 2017 2016 Which sectors?
Return Return Return Return The table below lists the
S&P/ASX 200 (Price) 11 industry sectors for the
21.3% -6.9% 7.1% 7.0% Australian sharemarket
according to the GICS
S&P/ASX 200 (Accum) 26.1% -2.8% 11.8% 11.8% classification methodology.
It shows the sector weighting
as a proportion of the S&P/
ASX 200, the return (including
ASX 20 (Accum) 23.4% -0.4% 7.3% 8.8% dividends) for 2019 and the
returns for calendar 2018,
Midcap 50 (Accum) 23.6% -7.4% 22.1% 17.8% 2017 and 2016.
Small Ordinaries 21.7% -8.7% 20.0% 13.2%
(Accum)
*2019 to 30 November
sector returns
Two matters stand out.
Sector Index 2019 2018 2017 Return 2016
Firstly, the variability of the
Weight Return* Return Return
returns. Although all sectors
Consumer 6.6% 35.9% -7.7% 13.6% 11.9% are positive in 2019, the gap
Discretionary between the best performing
Communication sector (healthcare at 47.4%)
3.7% 35.1% -17.9% -21.3% -7.1% and worst performing
Services
(financials at 15.4%) is quite
Consumer Staples 6.1% 31.6% 4.7% 20.2% 4.8% material. Secondly, the lack
of consistency from year to
Energy 5.4% 24.8% -8.6% 23.3% 15.8% year. So, getting the view right
Financials on each sector, in terms of
29.7% 15.4% -9.7% 5.0% 10.3%
whether you should be over-
Health Care 10.5% 47.4% 19.3% 26.4% 1.9% weight, under-weight or neutral
(index-weight), can have a
Industrials 8.6% 31.0% 0.0% 18.2% 10.5% pretty big impact on portfolio
IT performance.
2.5% 39.9% 7.3% 26.0% 4.5%
What will be the best and
Materials 17.4% 25.3% 1.8% 22.9% 42.9% worst performing sectors in
2020? Here is my take on each
Real Estate 7.6% 27.7% 0.2% 6.2% 12.4% sector (in descending order of
Utilities market capitalization).
1.8% 15.3% -5.1% 9.0% 19.4%
*2019 to 30 November
Paul Rickard INVESTMENT OUTLOOK
What will be the best and worst
performing sectors in 2020?
Here is my take on each sector (in descending order of market capitalization).
a) Financials – Index-weight e) Real Estate – Index weight
The major banks have been laggards With interest rates staying low and demand
and the sector has underperformed for east coast office and industrial property
for the last four years. While mean strong, investor interest in trusts focussed
reversion is a possibility, it is hard to on these sub-sectors will be fairly resilient.
see the market wanting to re-rate the Caution around trusts trading at significant
sector in the short term while earnings premium to NTA and shopping centre (retail)
are under pressure. And with interest trusts.
rates staying so low and credit growth
relatively anaemic, opportunities to
grow earnings look more likely to f) Consumer Discretionary – Over-
come from the cost line rather than the weight
revenue line. Largely a stock by stock proposition, but one
But, capital pressures have abated of the better performing sectors in 2019 and
and fully franked dividend yields in one that should benefit from very low interest
the range of 5.5% to 6.5% will look rates, an improving housing market and
very attractive to some investors. I hopefully, an uptick in consumer confidence.
don’t think it is a sector to be short
(underweight), but I can’t quite bring
g) Consumer Staples –Under-
myself to going over-weight.
weight
This sector surprised in 2019 with strong
b) Materials – Under-weight performances by leaders Woolworths, Coles,
Brazilian miner Vale resuming full Coca-Cola and a2 Milk. Although a defensive
production should act as a cap on sector, it does look very pricey and for the
iron ore prices. This will limit the major supermarkets, the earnings trajectory is
opportunities for major miners BHP, Rio weak. Moderately under-weight.
and Fortescue, who have now taken the
easy wins on productivity .
With world economic growth softening
h) Energy – Index-weight
Over the last couple of years, OPEC has been
and the potential for a stronger US
remarkably successful at “managing” the
dollar, commodity prices look set to
production of oil from OPEC and some non-
remain in a softer cycle. While gold and
OPEC nations. Accordingly, the price hasn’t
some other precious minerals were big
been able to break down below US$50 per
winners in 2019, with the US Federal
barrel. Notwithstanding that the global growth
Reserve now appearing to be on hold
outlook is somewhat subdued, I am inclined
and trade tensions easing, I would be
to play this sector in the expectation that the
surprised if they continue to rally in
$50 price level will hold and that the returns
2020.
for Australia’s energy companies should be
Non mining material companies, such
as Amcor, Bluescope or Orora have largely ok. Index-weight.
appeal, but they will be pressured if
growth in the USA slows or a trade deal i) Communication Services – Index-
is not done.
weight
Telstra’s rebound caused this sector to be one
c) Health Care – Over-weight of the better performers in 2019. It came after
The best performing sector on the three very tough years. While pressure on
ASX in 2019, 2018, 2017 and over the mobile pricing appears to be easing, it will be
last 5 years and the last decade, not a difficult for the incumbents to grow earnings Summary
sector to be short as the tailwinds of an while customers are switching to the NBN. 5G This is how I think you play the
ageing population, increasing demand could be an upside. Index-weight.
for health services and increasing
sharemarket in 2020:
expenditure by government keep
blowing. Some of the stocks are very j) Information Technology – Index-
expensive but the risk is that they could weight • In the market, but not looking to
get even more expensive. Very much a “stock by stock” proposition. increase your overall exposure;
A risky call, but my hunch is to stay The macro drivers say that this is a sector to
overweight. be overweight, but the paucity of Australian
IT companies means that many of the sector •Stick with your “expensive
leaders are hideously expensive. defensives” and genuine top-line
d) Industrials – Index-weight
This sector is arguably misnamed,
k) Utilities – Under-weight
growth stocks;
because some of the leaders (such
This sector underperformed in 2019, and
as toll road operator Transurban and
despite ultra-low interest rates, downward
Sydney Airport) aren’t really industrials
pressure on wholesale electricity prices will •A slight bias for the large cap
in the classic sense. Qantas is also in stocks;
make it hard for the sector leaders.
this category.
Because of the variety of companies
that the sector covers, it is largely a
stock by stock proposition.
INVESTMENT OUTLOOK Tony Featherstone
3 LARGE CAP STOCKS TO CONSIDER IN 2020
BY TONY FEATHERSTONE CONTRIBUTOR, SWITZER REPORT
Predicting what the share market
index will do next year is a losing
game. Instead, focus on bottom-up
My top three large-cap stock
selections for 2020 are: Telstra
Corporation, ANZ Bank and Woodside
“Shares remain
analysis: identify quality companies
and buy them when they trade below
fair value.
Petroleum. More on them shortly. I’ll
nominate my three top mid-, small-
and micro-cap stock ideas for 2020
relatively
From an asset-allocation perspective,
– and a few sell ideas – in coming
columns for The Switzer Report. cheap against
I’m reasonably comfortable with
equities in 2020. Shares remain
relatively cheap against bond yields
First, a recap of my top ideas for
2019. After all, what is the point in
bond yields and
and global growth should improve commentators suggesting positive
a little next year. So too Australian
economic growth, as another two
or negative stocks ideas if there is
no accountability? The blur of “top
global growth
should improve
expected rate cuts next year spur stocks for the year ahead” stories
demand. adds to market noise if they are never
Geopolitical, trade and political followed up.
risks, notably around US President
Trump, remain. But it felt like there
were bigger threats for global share
I nominated Coles Group, Auckland
International Airport and British
a little next
year...”
markets this time a year ago. bank CYBG (now Virgin Money UK
Plc) as top buy ideas for 2019. Their
Still, I can’t see the S&P ASX 200 total return (including dividends
index delivering another total return over one year was 37%, 31% and
(including dividends) above 20% as 6% respectively, Morningstar data
it did this year. A likelier outcome is shows. CYBG’s performance was
a low double-digit return. However, complicated by its Virgin Money
forecasting market indices, as I said, merger.
is guessing.Tony Featherstone INVESTMENT OUTLOOK here are my 3 tips: 1. Telstra Corporation (TLS) The leading telco has rallied from a 52-week low of $2.71 to $3.73 as the market reappraises its prospects. Telstra has much ground to make up: over three and five years, the annualised total return is slightly negative. The 10- year annualised return is only 8%. The market’s bearish view on Telstra was based on two key factors: intense competition in all telecom segments, and the billion-dollar hole in its earnings left by FY22 once the National Broadband Network (NBN) is fully rolled out. Rising regulatory risk is another threat. However, Telstra boosted its profit guidance in September because a drop in the expected number of NBN-connected homes this financial year and more customer remaining on its wholesale network. At its Investor Day in late November, Telstra reiterated guidance and confirmed more rational competition (ie less insane discounting) in the mobile segment. And progress in the 5G rollout is on track, giving Telstra a potential first-mover advantage in next-generation mobile. Telstra looks like a simpler, leaner business that can better leverage a massive competitive advantage: Australia’s best fixed-line, mobile and broadband coverage. Plenty of costs are still to come out of the business and management should be able to plug a chunk of the earnings hole from the NBN. At $3.70 a share, Telstra is on a forward Price Earnings (P/E) multiple of about 17 times and expected to yield a touch over 4%, fully franked. An average share- price target of $3.29, based on the consensus of 12 broking firms, suggests Telstra is overvalued at the current price. The market is too bearish and I like the thought of holding a large-cap telco that dominates its industry if market volatility spikes in 2020. Telstra has much ground to make up. Source: ASX 2. Australia and New Zealand Banking Group (ANZ) After the annus horribilis for bank stocks in 2019, investors could be forgiven for deserting the sector. There’s no shortage of risk: ongoing scandals, regulatory threats, management and board changes, falling net interest margins, asset sales, public disgust… the list goes on. The savage de-rating of big-bank stocks has squashed years of strong gains. The Commonwealth Bank’s annualised total return over five years is 4%. Westpac and ANZ’s annual total return over that period is almost zero and NAB has returned 1.4%. But every stock has its price and buying when there is “blood on the street” – look no further than Westpac’s recent woes – is invariably a better strategy. Don’t expect a rapid recovery in bank stocks in 2020, just enough to provide slightly better returns than the market expects.
INVESTMENT OUTLOOK Tony Featherstone My preference is ANZ. Like other banks, ANZ faces lower credit growth, intense competition, the challenges of falling interest rates and declining net interest margins. Selling non-core businesses to simplify ANZ makes sense, but it also puts a hole in the bank’s earnings. I prefer ANZ partly because I have less faith in Westpac, which botched its response to money-laundering allegations, and the scandal-prone CBA. To my thinking, ANZ is the best-governed bank and deserves a premium for that. Cynics will argue that’s not saying much in a sector that has had governance shortcomings exposed by the Banking Royal Commission and the Australian Prudential Regulation Authority’s report on CBA. Still, I have more confidence in ANZ’s governance and like what CEO Shayne Elliott is doing to overhaul the bank by selling non-core assets and cutting costs. In the short term, ANZ and other banks should benefit from an improving property market and better credit demand, though don’t expect rapid gains. Longer term, ANZ is still the best-placed Australian bank to benefit from growth in Asia. At $24.72, ANZ is on a forward P/E of about 11.7 times and expected to yield 6.5%, partially franked, consensus forecasts show. The expected grossed-up yield at the current price is about 8.5% - attractive relative yield in an income-starved market. The bank has plenty of headwinds, but they look to have been baked into the valuation, and then some, at the current price. An average share-price target of $28.83, based on the consensus of 13 broking firms, suggests ANZ is undervalued at the current price. I’m not as bullish but expect ANZ to deliver a solid double-digit return in 2020 – at a reasonable level of risk after the sector’s battering. Source: ASX 3. Woodside Petroleum (WPL) Investors could be forgiven for losing interest in the energy giant. Its share price has been largely range-bound since 2011 and the five-year annualised total return is 3%. Woodside has fallen from a 52-week high of $37.70 to $33.68. The stock’s 17% total return over one year lagged the market return. Woodside said at its recent Investor Day that its Scarborough gas resource, about 375 kilometres west-north-west of the Burrup Peninsula in the Carnarvon Basin, is progressing towards development. Woodside and BHP had agreed on a tolling price for processing gas from the Scarborough field through to Woodside’s Pluto LNG facility – an important milestone. Woodside is also targeting first production at its Sangomar Field Development – Senegal’s first offshore oil development – in 2022. Progress on the Browse Joint Venture – Australia’s largest untapped conventional gas resource – is another catalyst in the next 12-18 months.
Tony Featherstone INVESTMENT OUTLOOK Source: Woodside Energy Ltd. The main risk is Woodside’s project development timeline blowing out. The company plans to get to around 150 million barrels of oil equivalent (mmboe) by 2028, from 89-91 mmboe in calendar-year 2019. Woodside looks like short- term pain for long-term gain. The company has a magnificent asset base: its key projects have long lives and strong expansion potential. Longer term, Woodside will benefit from rising demand for gas from a growing global population, particularly from Asia, and because of market performances for lower-carbon energy sources. The company is well run and governed. 2020 could be the year when the market takes more notice of Woodside’s progression and becomes more confident it will meet its milestones on time. At $33.68, Woodside is on forward P/E of about 20 times and expected to yield about 4%, fully franked. An average share-price target of $27.09, based on the consensus of 12 broking firms, suggests Woodside is overvalued at the current price. The market is too bearish and overlooking the potential for several catalysts in the next 12-18 months to re-rate Woodside. After several years of flat gains, 2020 looks like a good entry point for exposure to a standout energy company. Source: ASX Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without con- sidering your objectives, financial situation or needs. Before acting on information in this article consid- er its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 6 December 2019.
INVESTMENT OUTLOOK Julia Lee
my tips for 2020
BY JULIA LEE CHIEF INVESTMENT OFFICER, BURMAN INVEST
The easing cycle started in June 2019 CURRENCY - LOW $A BUY: Credit Corp (CCP)
is expected to continue into 2020, The low $A helps support the Annual General Meeting Season
with low interest rates supporting Australian economy and gives is almost over. For investors, it’s a
asset prices, including the share an edge to companies that make chance to revaluate the outlook for
market. Here are my tips for 2020. revenues offshore. In 2020, Burman a company over the next 12 months.
Invest will be overweight with these Credit Corp has said that while its
Interest rates are falling. In previous types of companies. In particular competitors are under pressure,
easing cycles, 1996, 2001, 2008, continuing to support companies total collections for CCP are up 17%
2011 have in all but one of the years such as: so far compared to the previous
resulted in a positive share market corresponding period. Credit Corp
performance in the following year. 1. Credit Corp Group Limited (CCP), buys distressed debt from mainly
2001 was different, as the US ran into 2. James Hardie Industries plc major banks and finance companies,
a recession in 2002. This easing cycle (JHX), which make up around 80% of its
started in June 2019 and is expected 3. Fisher & Paykel Healthcare Corp business in Australia. The exciting
to continue into 2020. The low Ltd (FPH) and part for CCP is that it’s moved into
interest rates should support asset 4. Janus (JHG). the US market, which is 10 times the
prices, including the share market. size of the Australian PDL market.
It generated its first profit from the
US in FY18 and profit accelerated
in FY19. This is a company that is
growing in a new, bigger market.
BUY: James Hardie (JHX)
James Hardie derives a majority of
its earnings from the US housing and
renovation market. It is expected to
benefit from activity underpinned by
strong employment, wage growth
and aging housing stock.
retail market to remain tough
The large amount of debt that
Australians hold mean that
discretionary spending will continue
to come under pressure. The magic
combination in the retail space is
strong new store rollouts together
with sales growth in existing stores.
In retail, the specialty stores should
do well and Baby Bunting (BBN)
would be an example of a company
that should do well. Most of its
largest competitors have closed. A
positive catalyst would be a possible
store rollout target upgrade in coming
months.
Source: James Hardie Ltd.Julia Lee INVESTMENT OUTLOOK WHAT ABOUT BANKS? The time to get into banks is when there are signs that the economic weakness has bottomed out and there is a strong possibility that interest rates will start to rise. Banks struggle in a low interest rate environment. If I had to pick a bank, I’d go with unconventional and pick Macquarie Group (MQG). It has less exposure to the domestic mortgage market and a strong ability to adapt to market conditions. WHAT ABOUT INCOME? The search for yield has been a strong driver of returns. Companies such as Charter Hall have gained 40% in 2019, Sydney airports is up 35% and Transurban is up 30%. With the search for yield trade now maturing, there’s a need to search for yield in unconventional places. One of those unconventional ideas is Genworth Mortgage (GMA). Genworth is a mortgage insurance company. In Australia, house prices are improving, home lending should be picking up and growth is back at Genworth. A key factor for a company like Genworth is unemployment as it’s the key driver of delinquencies. If unemployment remains stable and the housing market continues to stabilise, Genworth should be a winner. Importantly for income investors, it has an attractive dividend yield of 5% as well as a strong growth profile. In the large style income universe, Telstra (TLS) is up 30% in 2019 and should continue to perform well. With first mover advantage in 5G, it could also benefit from potential NBN wholesale cuts, seeing revenue growth outperform expectations. SMALL STOCK TIP: EML PAYMENTS EML payments is a fast growing digital card and pre-pay card company. In November acquired Prepaid Financial Services: European provider white label payments/ banking. With many levers for growth, this is a company which will mostly likely double revenues over the next couple of years.
INVESTMENT OUTLOOK Vihari Ross
Vihari Ross INVESTMENT OUTLOOK
The china-us trade war & interest
rates hold the key to stocks in 2020
BY VIHARI ROSS HEAD OF RESEARCH, MAGELLAN
Many of the world’s major stock nature and are unlikely to be resolved protect the US economy from the
markets ended 2019 at around record soon because China’s economic rise uncertainties created by the trade
highs. Whether stocks can set fresh and the associated military and soft war with China.
peaks in 2020 is likely to hinge on power that brings are unlikely to be
two macroeconomic considerations: curtailed. The perceived risk that The Fed’s rate cuts helped extend
this brings for the US and its allies the multi-decade decline in long-term
1) The trade conflict between the US has brought about the increased bond rates that is tied to structural
and China. protectionism and nationalism we factors such as ageing populations
2) The likely direction of long-term have seen in recent years. and the deflationary impacts of
interest rates. The tensions between China and the technology advances.
US symbiotically needing each other
On the China-US trade tussle, it is in the short term and the need to
important to separate the long term realign the nature of the relationship Likely outcomes
from the short term. The tensions over the long term are likely to weigh In the context of the elevated prices
between the world’s superpower and on sentiment in coming months we see on share markets today,
the usurper have weighed on the until, most likely, a truce is reached there are three scenarios centred
global economy from a sentiment that lasts until the US elections in on interest rates in play as we enter
perspective but also from a practical November. 2020.
perspective as the clash is harming
both sides. US manufacturing As for interest rates, their importance The first is a status-quo scenario,
indicators have been negative since for stocks was shown again in 2019 where the Fed cuts rates modestly as
August while China’s have been weak when the Federal Reserve’s signal in seen over 2019. Asset prices in this
throughout 2019. Given this, there January of an about-turn in monetary scenario might not change materially
is a decent probability of a short- policy drove share prices to record but the implications for stocks differ
term truce between the pair because highs over the year. according to their growth and quality
neither country wants tariffs to derail characteristics as well as sensitivity
its economy. This shift in market expectations to interest rates. Banks that rely
from rate increases and quantitative on the shape of the yield curve, for
Of the provisos on an imminent truce, tightening to lower rates played out example, would be challenged in
the first is that such an outcome is when the Fed repeatedly cut the such a scenario whereas defensive
subject to the currents of the US US cash rates over 2019 to largely assets would be resilient and growth
presidential election. It might, for assets advantaged.
example, be politically expedient
for US President Donald Trump to
act aggressively towards Beijing
“an outcome is A second scenario is a shock to
growth that would require the Fed
to highlight the perceived softness
of the Democrats on China. The
subject to the to ease aggressively. The market
impact of this is uncertain, however,
as it skews to the downside the more
other proviso is that China is better
positioned to take a longer-term view
– to ‘wait Trump out’ – in the hope his
currents of the a collective view takes hold that a
severe economic slump is likely.
successor will be less hardline.
us presidential The final scenario is the small risk
that that inflation re-emerges. The
The fundamental issues between
the parties, however, are strategic in election...” still-expanding US economy, aINVESTMENT OUTLOOK Vihari Ross
jobless rate at a 50-year low and the Structural growth can be Companies such as Amazon,
Fed’s proposed ‘make-up’ strategy Facebook, Visa, Starbucks and LVMH
where inflation would be allowed driven by: stand to benefit from these tailwinds.
to remain above its 2% target could The key feature of this growth is
push inflation to levels that warrant - Significant technology shifts like that it is agnostic to economic
an aggressive response from the Fed. cloud computing, an addressable circumstances or inflation rates.
This is the largest risk to markets market of up to US$1 trillion that Another well-positioned company
in our view going into 2020. In this is dominated by the hyperscale is Alibaba because it taps into the
scenario, a significant slump in stock players of Google, Microsoft and consumption growth opportunity
prices is not inconceivable. Amazon. within China as well as those in cloud,
payments and digitalisation.
In our view, the most likely scenario
is that interest rates will be lower
for longer, which has important
“lower rates A structural advantage matters given
the uncertainties surrounding stocks.
reflect a broad
implications for global equities It provides confidence a company
valuations. won’t succumb to disruption threats.
It helps determine which businesses
All else being equal, lower interest
rates imply higher stock valuations
as happened over 2019. Yet at the
slowdown will be positioned to benefit from
these tailwinds we have identified. In
the context of lower rates, a structural
same time, lower rates reflect a
broad slowdown in economic growth, in economic advantage provides conviction in the
predictability of the cash flows a
proportionately lower forecast cash business will generate and, therefore,
flows and, in fact, no net elevation in
valuations. growth” what it is worth.
The Magellan portfolios are designed
But while it is a mistake to inflate - E-commerce growing from its to hold such quality companies so
all valuations with lower rates, it is current 5% of retail sales. that they are positioned to navigate
equally important to determine which - The shift in advertising towards the uncertainties, known or otherwise,
businesses deserve higher valuations digital channels and, in particular, to hovering over 2020.
coincident with lower rates. These on-demand video;
are the companies that enjoy resilient - Digital payments growth.
and growing cash flows thanks to - Demographics such as the
structural competitive advantages. doubling of the Chinese middle
class from 300 million to 600 To sign-up to Magellan’s Insights
These are the businesses that will million in the next five to 10 years. programme, please visit:
drive the performance of global https://www.magellangroup.com.au/
markets into 2020.Charlie Aitken INVESTMENT OUTLOOK
outlook for equities in 2020
BY CHARLIE AITKEN CEO, AITKEN INVESTMENT MANAGEMENT
‘Tis the season for outlook pieces! start the process of defusing the
We are cautiously optimistic about trade war inches forward. While
the outlook for equities in 2020, this is not the first time markets
though we do think returns will be have believed both sides to be
lower than the outsized gains of close to a deal, there does seem to
2019, given the higher valuation be more willingness to find some
levels that markets are starting from. common ground during this round
of negotiations.
As we look back at some of the
headlines that were responsible for An interim resolution to the current
sizeable bouts of volatility in 2019 trade impasse would probably
(a choice between “inverted US yield remove the threat of further US tariffs
curves”, “worsening China-US trade being levied on Chinese imports,
war”, “hard Brexit”, “Hong Kong riots”, and potentially also include some
“spiking overnight cash rates” and bilateral roll-back of the existing
“pending weak US earnings”), there tariffs already in play. Both steps
is no doubt that markets had ample would be positive for US consumers
reason to be nervous. Now heading and businesses, but particularly for
to the end of the year, markets the latter: any increase in policy
have mostly recovered from these certainty will provide a boost
anxieties, as economic data seems to business confidence and be
to be bottoming in many places supportive of extending the cycle.
around the world. Recent data points
in the US have modestly surprised The fact that the Fed has become
to the upside, and the consensus more accommodative since
outlook for 2020 seems to be that July is also positive. The chart
economic activity will remain in (following page) shows the US ISM
positive territory. The feedback from Manufacturing New Order index
most companies coming out of the against the Fed Funds rate (with
recent US earnings season is that the latter inverted) over the past 20
growth will likely continue to slow years. Worth noting is the lagged
but remain in positive territory, and effect the tightening policy has on
then improve towards the latter half the direction of the manufacturing
of 2020. survey.
Against the backdrop of better data, With hindsight, it’s not difficult
the negotiations between the US and to make the case that the Fed’s
China to reach a preliminary deal toINVESTMENT OUTLOOK Charlie Aitken
‘autopilot’ policy of rate hikes in 2018 exposed to consumer spending. US
was too aggressive; at least the Fed
has already changed course this
consumers have experienced solid
tailwinds over the last few years:
“throughout the
cycle. unemployment sits at multi-decade
lows, real wage growth has picked volatility of 2019,
Despite the improvement in data, up and household balance sheets
we think that the global economy
remains in a low growth, low inflation
have been substantially improved
from levels seen prior to the Global
the us consumer
paradigm. To us, that equates to rates
staying lower for longer. The Fed at
Financial Crisis. Combined with very
low inflation and some tax relief,
has remained a
the December 2019 FOMC meeting
held rates steady, as expected. There
the average American consumer is
feeling wealthier, and has therefore bright spot on the
were few changes to the policy been inclined to continue spending.
statement, although the prior mention
of “uncertainties” about the outlook The chart (below) demonstrates this:
ongoing economic
was removed. Chairman Powell
said he wants to see a “significant
US household debt as a percentage
of disposable income has declined expansion...”
and persistent move up” in inflation from its’ pre GFC peak, whilst the
before the Fed moves to raise rates savings rate has improved.
from here, which serves to provide
some clarity around the future rate
trajectory and likely anchors inflation
expectations around current levels.
Given this combination of factors
(low growth, low inflation, low rates)
we still prefer companies that can
generate internal growth, but we are
vigilant about the margin of safety
we pay for them.
Throughout the volatility of 2019,
the US consumer has remained a
bright spot of the ongoing economic
expansion– not a huge surprise,
given that nearly 70% of US GDP isCharlie Aitken INVESTMENT OUTLOOK
Consumer spending is ultimately At this stage, we are reasonably to spend seem unwilling, whilst
highly correlated with confidence comfortable that the US consumer those are willing to spend can least
in the future of the economy, both remains in a position to support afford it. Economic conditions would
at a household and business level. economic expansion in 2020. have to worsen materially before
The weak economic data seen in the governments finally shoulder some
second half of 2019 has been largely When we look at the key risks for of the burden they have asked central
at the business level, and the main 2020, obviously a trade war escalation banks to carry for the last decade.
cause seems to be the confidence- remains near the top of the list, given
and certainty-sapping effects of the that an economy growing around 2% The other potential source of
ongoing trade war. is simply more vulnerable to such an inflationary pressure could be a
external shock than one growing at a combination of a tightening US
US consumers, on the other hand, higher rate. labour market alongside too-easy
have mostly shrugged off the monetary and fiscal policy, leading to
uncertainty. The decline in 30-year
fixed mortgage rates have positively “on the whole, we an overheating US economy.
impacted housing activity, and This would force the Fed to put up
refinancing volumes have increased believe market rates and given that this is not an
significantly over the last year as income currently priced in by markets,
rates have come down. Household
durable purchases have remained
volatility will remain it would likely have a sharply negative
effect on sentiment. We don’t think
solid. elevated” this is a likely outcome in the very
near term – there are more concerns
Given that 2020 is also a Presidential The main left-field risk we see on about deflation than inflation – but
election year in the States, it would the horizon is a sustained pick-up we do think this is a long-term risk
seem obvious that the White in inflation, though it’s difficult to worth keeping an eye on.
House understands it cannot see where the inflation really comes
afford consumers to feel the pinch from. Fiscal stimulus – particular as On the whole, we believe market
if President Trump wants to see an outcome of increasingly populist volatility will remain elevated,
a second term. Pleasingly, the politics – is one potential source, particularly in a US election year,
latest data point on the US labour though we are hesitant to construct but we think equities can still offer
market was positive with November portfolios based on political reasonable returns in 2020. We
nonfarm payrolls of 266K (against outcomes. Our only comment on continue to back businesses with
184K expected) dropping the US this matter would be that in many economic moats that we believe can
unemployment rate by 0.1% to 3.5%. cases, governments who can afford compound over time.INVESTMENT OUTLOOK Margaret Lomas
will property come roaring
back in 2020?
BY MARGARET LOMAS FOUNDER, DESTINY FINANCIAL SOLUTIONS
I’ve been having some interesting
discussions with property investors
lately and the subject has centred
around property and growth.
Everyone understandably wants
some kind of reassurance that they
won’t buy a property, only to find that
it falls in value, and often the fear that
we are in an uncertain market holds
them back from buying any property
at all.
2020 is going to be bringing some
challenging times, and a mixed bag.
There are so many questions – will
the two big markets of Sydney and
Melbourne return enough growth
to get back to where they were and
grow again? Will Perth recover? Will
the uncertain economy mean that
nowhere is a good investment? Many
of these questions are asked by
investors who already own property
in these markets, and they’re
looking for answers as to how their
investments are likely to perform.
It’s easy when you have shares. You
know exactly what a share is worth
on a daily basis as it is priced literally
by the second. But when it comes to
property, you can never really know
what your property is really worth
until a contract to buy it is signed.
There’s plenty of speculation and
opinions from real estate agents,
but as many property owners know,
you can take most of these with a
grain of salt. I want to encourage all
property investors to stop thinking
like a share investor and expectingMargaret Lomas INVESTMENT OUTLOOK
results on such a short-term basis. property that has lost considerable the balance (or lack of) between
Property will go up and down on an value, and so it’s no wonder they are supply and demand at that time.
almost monthly basis, depending usually conservative.
upon activity in the area, but this is As well as this, when an area becomes
not a reflection of what will happen What I am trying to tell you is that you a hotspot, home-owners take the
over the longer term, which is likely to can’t invest in property with a share chance to upgrade to another area
be your investing time horizon. investor mentality – you must think and investors come in and buy up
differently, particularly right now, a lot of the stock. For a while, this
If a good report comes out about when no one can really forecast what results in a rental oversupply, and
an area, you can bet buyer activity will happen to any property market. you could find yourself renewing any
will increase until such times as that lease at a lower yield than it had when
report is proven or not, and so in the
short term, median price on recent “media hype about you bought it. Again, this doesn’t
mean you bought a property with a
sales could be up. A few months yield that is going backwards – it’s a
later, the situation could change auction clearance reflection of short-term buyer activity
altogether. But, as you can’t buy and that will most likely, in the future,
sell as easily as you can a share, this rates should largely work its way out. It all comes down to
be ignored.”
is of little consequence to you. thinking a little more long-term and
realising that property investment
Property values are, of course, all shouldn’t be a speculative one. Short
about demand. Lots of sales provide If you are buying now you must do term movements should mean little
an immediate impetus for growth. so with an expectation that whatever to you. Media hype about auction
Less activity can make it hard to get you pay will most likely change in the clearance rates should largely be
a good handle on a value and also short term, and it might not change ignored. You should buy property
makes it appear, at that moment in in the direction you hope. If you buy fundamentally – and to do that you
time, that the area is not in demand, during a time of short-term buyer have to know whether it possesses
and so the value will reflect this very interest, as we seem to be seeing long term growth drivers which will
current situation. Even professional in Sydney and Melbourne, once you see it through the short-term ups and
valuations only reflect the situation settle it’s likely there will be even downs that short term supply and
at that moment in time, rather than more properties listed (as vendors demand inevitably brings.
what an area is likely to do over a realise the short-term interest and
longer period of time. list their properties too late to take If an area lacks growth drivers, then
advantage of it, creating a short-term the price you pay is less protected.
I’ve never seen a valuation that oversupply) and this will affect the But if it is rich in growth drivers,
takes into account the 20 Must price at which they sell. then don’t bemoan the short term
Ask Questions® and considers the volatility of values and rental yields.
relative strength of an area, and Someone may then buy the house Those underlying fundamentals will
this is not what a valuer has to do. right next door to yours and get a remain intact and, over the medium
Valuations protect lenders from better deal, but this doesn’t mean that term, result in stable and consistent
ending up with a forced sale of a the market is falling – it just reflects growth to all property in that area.INVESTMENT OUTLOOK James Dunn
my five top stock picks for 2020
BY JAMES DUNN CONTRIBUTOR, SWITZER REPORT
1. Nearmap (nea, $2.68)
Market capitalisation: $1.52 billion Web-based aerial imagery and location data company Nearmap has
Five-year total return: 33.3% a year been an excellent stock exchange performer in recent years, since
FY21 estimated yield: no dividend its backdoor listing in 2012. Nearmap is in the “geo-spatial” business
FY21 estimated P/E: no profit
– it provides frequently updated, high-resolution aerial imagery
Analysts’ consensus valuation: $4 (Thomson
to customers in industries such as urban planning, architecture,
Reuters), $4.08 (FN Arena)
construction, infrastructure, government and defence.
Nearmap is rolling-out Nearmap 3-D, which allows customers to stream
and export very large-scale 3-D imagery, and new AI technology that
is turning millions of aerial images, captured over a decade, multiple
times a year, into valuable datasets, which customers can use to more
accurately and efficiently measure change and quantify attributes. The
company grew its annualised contract value (ACV) by 36% in FY19, to
$90.2 million, with more than one-third of its work now in North America,
but disappointed investors by reporting a loss that widened for the year
to $14.9 million – instead of falling – and declining to provide guidance
for FY20.
NEA redressed that at its annual general meeting in November when
it told the stock market to expect ACV of between $116 million and
$120 million in FY20, which would represent growth of 29%–33%. The
company is one of Australia’s software-as-a-service (SaaS) stars, but
it must be stressed that net profit is not expected this year or in FY21.
However, Nearmap is only scratching the surface of the North American
market, and has plenty of room for growth.
Market capitalisation: $183 million 2. RPM global (rul, 84 cents)
Five-year total return: 8.2% a year
FY21 estimated yield: no dividend Australians are very familiar with mining investment, but also familiar
FY21 estimated P/E: no earnings with the goldfields adage to the effect that the real money is made by
Analysts’ consensus valuation: n/a the people selling shovels to the miners. RPMGlobal is the modern
equivalent of that – it sells tools to miners, but in its case, the tools are
a suite of state-of-the-art enterprise software technology packages for
miners around the world, in a wide range of commodities. RUL is right in
the “sweet spot” of the laser-like focus that mining companies have on
their costs and productivity – which are aspects of their business that
they can control. RUL’s products allow them to do this.
RPM Global slipped back into net loss in FY19, despite revenue growth
of 8.5% – the loss was mostly due to an adjustment for de-recognised
deferred tax. Pre-tax profit tripled, to $1.8 million. In November 2019,
the company updated the market that the total contracted value (TCV)
of software subscription licences had – with six weeks left in the
December half-year – exceeded FY19’s full-year subscription TCV; and
that annual recurring revenue (ARR) from software subscriptions had
increased to just over $8 million a year – in FY19, software subscription
ARR was $4.3 million. A business growing its recurring revenue like that
is gold on the stock market.You can also read
