2017 has started well. Will it continue?
At the start of 2016 the world was worrying about Chinese growth fears. This fear, contributed to volatility, the like of which had not been experienced since 2011.
It was difficult to achieve a positive return in 2016. It was a year when taking on more risk was not always rewarded.
- Last year the concern was China. This year the concern is Brexit and President Donald Trump (PDT).
- The Australian Economy contracted in the September quarter but is not expected to go into a recession.
- Low wage growth is subduing spending. This is bad for profits and jobs.
- Employment growth has continued to disappoint.
- Commodity prices have lifted and if this continues does offer some hope.
- The Reserve Bank of Australia (RBA) is likely to leave rates on hold.
- Investment Value should be found in aged care as our population ages.
- Banks are likely to continue to offer a good yield but muted growth.
- Continue to look for stocks with exposure to the UK Pound and US dollar.
- “Sell on the rumour, buy on the news.” This sums up PDT’s win.
- The big fiscal stimulus promised by PDT, plus planned corporate and personal tax cuts has seen the American market reach new highs.
- Has, or will the market get ahead of itself? The risk to watch out for?
- US valuations are above their long term average. US interest rates are likely to increase. Increased rates are not good for firms holding debt.
- We are unlikely to really know what effect the PDT administration will have on the American economy until February at the earliest. That said, so far it is looking good.
- The UK government might have to navigate a very hostile Brexit environment. However, I believe the pound will increase at some point.
- Europe seems mixed but OK. The risks include: the fragile Italian banks; that Brexit will cause other countries to leave the EU; and that “popular” politics will bring in the far right to help govern.
- Still cautious in Japan, China and Asia, although China is projected to grow at about 6% this year.
- Late in the commercial property cycle, so maintain 10-12%. Likely to offer yield only.
- Expect increases generally globally.
2017 looks like being a very interesting year. If PDT can control his thin skin, his temper and his Twitter diplomacy, he may move the American economy in the right direction.
Some of the risk is that the American economy will falter under too much protectionism and an expanding deficit to satisfy promised tax cuts. However, in the traditional Australian way, we will give PDT a “fair shake of the sauce bottle”!
My advice is to stick to your intended portfolio strategy but to look for areas that offer opportunities. In other words, look for small tactical adjustments within your strategy, rather than changing your whole strategy.
I believe that the UK Pound will improve, as the terms of Brexit become clearer. Stocks like CYBG PLC, (the Clydesdale and the Yorkshire Bank), Wesfarmers and Henderson, should all benefit from this.
Stocks with US dollar exposure, Macquarie Bank, Amcor, Brambles and CSL should benefit from the Trump effect.
Hold banks for yield and buy heath care.
Having a well-diversified portfolio with quality assets should give you faith that you can weather the storms and other challenges of 2017.
The next few years may turn out to be more challenging than the previous few. We are in a low growth, low return era. Real returns of 4-5%pa will be good.
I look forward to our next meeting and as always please feel free to contact me anytime.