John Collett finds the silver lining for investors in the Aussie's latest slide against the greenback and shares with good yields offer the best prospects.
The news couldn't be worse. Continuing woes in the euro zone, weak US economic data and concerns about weaker growth in China have left Australian investors with a bad case of the jitters. They're asking why they should be exposed to the sharemarket when they can get good returns on term deposits that have the backing of the government on deposits up to $250,000.
Professional investors, on the other hand, get paid to see past the latest set of gloomy economic numbers. And despite the challenges, some are daring to feel moderately optimistic.
"I think things are starting to move in the right direction," the chief investment officer at Maple-Brown Abbott, Garth Rossler, says.
"The Australian dollar is down 8? against the US dollar and interest rates are down," he says. "These are positive factors," says Rossler, who has managed money since 1985.
The lower Australian dollar helps exporters and inbound tourism, while lower interest rates help consumer confidence. Australian share prices are back to where they began the year. As for the past two years, the initial run-up in Australian share prices faded as fears over the global economy increased.
Almost any company that's considered to have a reliable dividend yield, such as Telstra, property trusts and infrastructure, has done well.
But offsetting the winners are the "cyclical" stocks: those whose fortunes are tied to the economic cycle - resources companies and building materials, for example, which have done poorly, the head of Australian equities at Schroder Investment Management Australia, Martin Conlon, says.
He says, however, that Schroder's valuations are pointing towards industrials, banks and large resource businesses as offering superior prospective returns in the long term over companies with defensive cash flows that have had sharp run-ups in their share prices.
But others are still very cautious on cyclical shares.
The head of equities at Morningstar, Andrew Doherty, says the company is "still encouraging investors to focus on income because of the slow-growth environment".
With trouble in Europe and around the world, investors cannot expect strong capital-value increases, he says. Solid businesses producing good yields seem to offer the best prospects.
BETTER THAN CASH
Rossler says that although we're going to have continuing volatility, investors are better off in shares than cash. Term-deposit interest rates are on their way down and further cuts to the cash rate are expected.
Even though many shares paying high dividends have had a good run, some still offer good value as well.
Telstra has had a very good run during the past year. The stock is on a yield of about 8 per cent after franking credits. "It is not as cheap as it was but its yield is still very attractive," Rossler says.
Doherty also likes Telstra. "Even now, it is attractive buying," he says. "The National Broadband Network payments are a boon for Telstra and the strong cash flows should allow the company to lift its dividend."
Morningstar analysts are forecasting the telco will lift its dividend to 33? a share (it is currently 28?) from 2014. "There is good growth in the mobile business and, in a market where there is great uncertainty, here is a stock with fairly certain earnings growth and an attractive yield," Doherty says.
Fund managers also like marketing and distribution company Metcash for its defensive earnings and a fully franked yield of about 10 per cent.
The head of company research at fund manager Constellation Capital, Brian Han, says Metcash is the "standout on the yield front".
He says although Metcash is a low-growth business, the share price still has upside. Rossler also likes Metcash and has it in his portfolio.
"I think there are good opportunities in the market and good underlying fundamentals for some stocks where their value is not reflected in their share prices," the head of research at ATI Asset Management, David Lui, says.
He likes Wesfarmers, the conglomerate that owns, among other businesses, Coles, Kmart, Officeworks and Bunnings, as well as a coal business and a fertiliser business.
"We like the diverse nature of the [Wesfarmers] business," Lui says. "We think that over the next six months, it may be an out-performer, thanks to interest-rate cuts, which is beneficial to 70 per cent of its business [the retail component]."
Doherty also likes Wesfarmers. "Through its restructuring, it is delivering good growth," he says.
Among the "growth" shares, Lui says CSL is a standout at the moment. He says the blood-products maker has been capturing market share against its peers, has a share buy back in place (which supports the share price) and is benefiting from the lower Australian dollar.
The share price has risen by about 20 per cent over the past few months, but Lui believes there is potential for it to go higher.
INCOME V GROWTH
The chief investment officer at Insync Funds Management, Monik Kotecha, says that over time, income-oriented shares have done a lot better than growth-oriented shares.
The Insync Global Titans Fund holds shares in between 10 and 15 companies, including Australian offerings. He says that in Australia, the fund manager focuses on companies with "predictability and consistency of earnings". He nominates Transurban, the toll-road operator, as a "wonderful" business and a "compelling" investment from among the yield-oriented shares.
It has interests in six toll roads in Australia and two overseas. Most are in urban locations where there is traffic congestion, and on most of the toll roads the operator is allowed to increase tolls in line with inflation or more, Kotecha says. In Sydney, it has the Hills M2, which is being widened, and it bought the Lane Cove Tunnel at a good price, he says. The yield is just over 5 per cent but is growing and, with that, the share price should also grow, he says.
Kotecha also likes Coca-Cola Amatil. It is a company that should be in every investors' portfolio, he says. The core business is in Australia and New Zealand, which produce 80 per cent of profits, but the company has a major position in Indonesia. Coca-Cola will benefit from exposure to this major emerging market, Kotecha says.
The head of company research at Constellation Capital Management, Brian Han, likes Brambles, which services the essential-goods sector with the supply of pallets, and the building materials company James Hardie. They pose a higher risk, with large exposure to the US, but will benefit from the lower Australian dollar. They are lower-yielding, Han says, with low franking levels, but have conservative balance sheets.
Golden rules for banks and miners
The backbone of many share portfolios are the big banks, BHP Billiton and Rio Tinto. Banks and resources are the dominant sectors of the Australian sharemarket.
Credit growth is slow, after growth rates of about 15 per cent during the years prior to the GFC.
That is a challenge for the banks. But they are enjoying strong deposit growth and have been able to manage their way through sluggish economic conditions with low levels of bad or doubtful debts.
The banks have pricing power, as shown by the way they can set their interest rates on their loans independently of the changes in the cash rate. That has allowed them to protect their profits.
ANZ is the pick of the big banks for David Liu of ATI Asset Management.
"ANZ is at the top because of its growth profile due to its strategy of growing its business in Asia," Liu says.
The strategy does not come without risks but it is the best relative value from among the big banks, Liu says.
It is also on a good yield of more than 8 per cent after franking credits.
For Garth Rossler of Maple-Brown Abbott, Westpac is the favoured bank. "Westpac has been a little bit ignored by the market, though its share price has come back in the last month or so," he says.
It is on a high yield and in a strong capital position.
Among the resources companies, Martin Conlon of Schroders says he has been surprised by how badly BHP Billiton and Rio Tinto have done relative to the market and to other resources companies.
A portfolio needs to have exposure to resources and Conlon favours the big miners.
He says there are risks that commodity prices could fall and investors want to be exposed to the miners that have the lowest operating costs and the best mines.
He leans towards BHP Billiton "primarily because we are more cautious on iron ore than other people," he says.
About 40 per cent of Rio Tinto's earning are from iron ore. Morningstar's Andrew Doherty prefers BHP Billiton to Rio Tinto because it is more diversified with more exposure to energy, for which demand will keep increasing.