Readings: Week 22 - 28 Jan 2018

2 Feb 2018

 

Outlook For 2018: Australia

 

The bottom line is that we will head into 2018 with a changing in the guard of economic drivers. There will be rotation among sectors.

 

– Brokers mostly upbeat, but not all
– Banks, miners and consumers in the spotlight
– Growth preferred over value
– Wide range of index forecasts

 

Investors are not yet complacent, let alone euphoric, hence caution and cash on the sidelines suggest stock market gains have not yet run their course. Volatility will, however, begin to make a comeback.

 

The US is all about Trump and tax reform, alongside Fed policy tightening. The UK has to deal with Brexit. The EU has to hang together to consolidate its recovery while the ECB looks to ease as well. China has a growing debt problem and seemingly perpetual risk of slowdown.

 

The Banks

We have a banking sector under siege from regulators and politicians. We are now seeing both the end of the mining investment slump and the end of the housing boom. We have consumers overstretched by mortgages set at historically low variable interest rates who are seeing no wage growth as they run out of savings. We have governments pouring funds into infrastructure, and businesses feeling the most confident they have since pre-GFC days.

 

It was all about the banks. The government “has the sector in its crosshairs”, leaving the regulatory risk premium elevated and limiting performance upside. The consensus on Australian banks is relatively consistent among brokers. As Citi puts it, “sentiment towards the banks and the political uncertainty seem to have been factors holding the market back” in 2017, and such sentiment is unlikely to improve in the near term.

 

Resources

ANZ Bank’s economists suggest that for the first time since 2011, there is some prospect of commodity prices enjoying sustained gains. 

 

And from a technical perspective, commodity price action looks strong.

 

China’s focus on reform and pollution will continue through to 2018 and together with producer discipline outside of China, the analysts expect elevated commodity prices, and hence healthy profits and increased returns for the sector. Slowing Chinese growth is a downside risk for spot commodity prices with any upside surprises being relatively short-lived.

 

The Consumer

Mortgages represent more than the traditional third, and in some cases up to a half, of household monthly budgets, in terms of repayments. Interest rates are most likely to rise from here. Inflation may be low but wage growth is negligible, meaning wages are going backwards in real terms. Utility bills have risen by ridiculous amounts, adding further burdens on top of mortgages.

 

History shows consumer spending is closely correlated with house prices given a consumer who “feels” wealthy will be more inclined to spend.

 

Morgan Stanley is on the outer with its consumer weakness warning. Janus Henderson expects consumption to grow “at a modest pace”. Macquarie suggests consumer spending will “muddle along” amid ongoing weak wages growth. Macquarie recommends no retail or food staples. 
 

High levels of household debt and low levels of savings mean the consumer is in no position to weather any shocks.

 

The Positives

The housing sector will not be as predominant an economic driver in 2018, but the good news is the mining slowdown has pretty much come to an end

 

Driving the economy forward in 2018 will be aforementioned government infrastructure spending. From a stock market perspective, this will benefit the building materials and engineering & contractors sector.

 

It is often overlooked that travel is one of Australia’s biggest exports. There weren’t many extra shrimps being thrown on the barbie when the Aussie was above parity, but the tourism industry is beginning to bounce back, with China the new primary driver.

 

Morgan Stanley is the most downbeat with regard to the ASX200 in 2018 among the sources drawn upon for this feature, but on the flipside, the broker sees “good alpha opportunity”. Alpha is the up/downside risk offered by an individual stock in its individual space as opposed to the “beta” risk of the market as one whole. If you buy “the index”, through perhaps an ETF or holding a portfolio of only big caps, you are playing beta risk. Holding a portfolio of “stories” – Chinese consumer growth, disruptor technology, batteries and EVs, ‘big data”, “the cloud”, and others beside – means you’re playing alpha risk.

 

If there is one theme we can be relatively confident of in 2018, it’s that of M&A

 

 

 

 

Farnam Street’s 2017 Annual Letter to Readers

 

As Goethe said, “tell me with whom you consort and I will tell you who you are.” But Goethe didn’t know about the internet. It’s not just the people you spend your time with in person who shape you; the people you spend time with online shape you as well.Tell me what you read on a regular basis and I will tell you what you likely think. Creepy? Think again. Facebook already knows more about you than your partner does. They know the words that resonate with you. They know how to frame things to get you to click.

 

A vast swath of what we consume makes us miserable. So much of what we are surrounded by is fake happiness. We want people to think we’re happy when we’re not. The louder and more frequently someone says their partner is “just the most amazing person in the whole world,” the more I suspect relationship issues. 

 

Increasingly, the feeds we follow show us an endless array of people having a good time, traveling, partying it up, and more. Individually, our friends might be able to do this once a year, but when you follow a few hundred accounts, you’re virtually assured that on any given day, one of those people is doing something marvelous. This makes us feel like crap: Why can’t I keep the house clean, pick up the kids, and not feel rushed all the time? Why do they have so much free time? Why didn’t they invite me? I want to be there. Why are those people always happy? How did they get so successful? I work just as hard as they do. And so on. We are surrounded by unrealistically positive expectations, which just remind us of what we don’t have: free time, money, an obsessively healthy lifestyle, diamonds, and a soul mate.

 

Nothing looks the same again. We feel alone. It seems like other people are nothing but successful and we do nothing but struggle. As our misery increases, we hide our struggles more and just show others the good stuff. Only it’s not real; we’ve just become part of the crowd of people pretending there is no struggle.

 

 

 

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