Amid increasing market volatility, as growth expectations for the Australian sharemarket are slashed, several analysts have pointed to housing and construction stocks, and shares with exposure to the US, as an area ripe for returns in 2015.
With the market two steps back from where it started the year, traditional sources of easy returns – financial stocks and mining firms -- have underperformed in an economy savaged by tumbling iron ore prices, plunging oil benchmarks, and uncertain financial regulatory future.
After opening the year at 5,352 points, the benchmark S&P/ASX200 index has lost 3.3 per cent of its value after a rocky year.
The disappointing year for the market has led to cuts in projections for the year ahead. Strategist for Deutsche Bank Tim Baker cut his forecast by 11 per cent.
He said Deutsche Bank was now expecting the ASX 200 index to reach around 5700 points by the end of 2015. For comparison, the index had touched a high of 5656 points in September this year, before a sell-off into summer.
Housing stocks are a good bet for the coming year, particularly as house prices cool, as it will encourage more people to buy or to build.
“Although housing stocks’ relative performance has been quite strong over recent years, we think there is a bit more left in the tank as that leverage comes through,” Mr Baker said.
He also tipped packaging manufacturer Orora, which is up 78 per cent this year, BlueScope, JB Hi-Fi, and Sonic Health.
Housing looks to be a sure bet, as the Reserve Bank offsets the demise of the mining boom with record-low interest rates in an attempt to stimulate the construction industry. It’s a sentiment echoed by Ric Spooner, chief market analyst for CMC Markets.
“Essentially, we have a relative housing shortage in Australia, our population growth is likely to remain solid, and interest rates are likely to remain low and or could even go lower,” Spooner said.
“While interest rate cuts remain a slight possibility, the Reserve Bank’s stimulating ability is a lot less now than if they were cutting from higher interest rate levels, and a cut would be unlikely to have as much as an impact as the falling dollar on the ability to encourage growth.”
His picks included building materials company CSR, up 31 per cent for the year, Mirvac, 6 per cent higher, and Stockland, posting an 11 per cent gain for the year.
With the mining sector down 16 per cent for the year and the financials edging only 4 per cent higher, mid-cap stocks could provide a better source for returns, as the Australian economy shifts away from traditional growth areas.
Financials are unlikely to lead the market anywhere next year, following a lacklustre performance in 2014. As investors faced uncertainty over what David Murray might propose in his financial system inquiry. But with continued doubt what will be imposed from Murray’s suggestions, bank stocks are still unlikely to shoot the lights out in 2015.
The stocks won’t perform, but worries about Murray’s implications for the banks are baseless, reckons Michael Heffernan, senior client adviser and economist for LonSec.
The wash-up from the report won’t be clear until half-way through 2015, and by then, the Abbott Government would be unwilling to frighten the horses a year out from an election.
Anything perceived to be too harsh by the four pillars could lead to a mining tax-style rebuke by the industry.
“It’s time to start watching mid-cap stocks, and stocks with exposure to the US in particular,” Heffernan said.
“Steer away from the resources sector, and oil and gas. I’d rather buy BHP at $35 on its way up, than at $29 going down.”
He tipped global biopharmaceutical company CSL, up 27 per cent for the year, packaging company Amcor, who increased 24 per cent, and supply-chain logistics group Brambles, who gained 10 per cent this year.
Recent volatility in the market will likely continue into next year too, with no clear direction in the Reserve Bank’s official rate, and increasing market speculation on the timing of a cut or a rise in the already record-low cash rate.
Winston Sammut, investment director for Folkestone Maxim Asset Management, predicts a continuation of a directionless, volatile market.
“We could be in for an interest rate cut if the housing market settles, but the Reserve Bank is unlikely to want to want to encourage further property speculation,” Mr Sammut said.
“We may well see the macro-prudential changes announced first, aimed at the investor market rather than first home buyers, before a move on the cash rate,” he said.
And with the RBA board not meeting until February, and in the event of a cut, March would likely be the earliest the bank could make a decision after giving the market appropriate forward notice, the sharemarket is likely to endure more volatility till then.
With the economy in transition, the days of reliable industry-wide growth are looking numbered.
Senior private client adviser for Macquarie Private Wealth, James Rosenberg, said it was very hard to find any industries with revenue growth at the moment, aside from the healthcare sector.
Many companies are cost cutting their way to profit, without actually increasing revenues.
“The domestic outlook is anaemic,” Rosenberg said.
“Consumer and business confidence are soft, retail sales are down, resources and energy stocks are tumbling - the transition away from a resources economy is frustratingly slow,” he said.
His advice was also to steer away from the financials, who were unlikely to outperform the market, considering Murray capital requirements would lead to lower dividend payout ratios – as opposed to lower dividends.
Non-bank financials will also find it hard to grow, particularly those leveraged to banks.
And energy stocks, down 19 per cent for the year to date, were set to plumb greater depths, but they should rebound in the second half of the year, Mr Rosenberg said.
“It’s difficult to pinpoint how low they might go before then. The first half of the year will be difficult for energy stocks.”
“But it’s still more difficult to see a recovery in iron ore prices and the mining stocks.”