2 February 2017
While reporting season will set the scene for the year ahead, investors can expect a subdued local economy and share market in 2017, while the international backdrop will be more positive, according to Bennelong Funds Management boutique asset management partners.
Julian Beaumont, Investment Director at BAEP, said, as always, reporting season will turn on how companies perform against expectations.
“Outside the mining sector, the market in aggregate is at risk of disappointing. Corporate earnings are unlikely to be as strong as expected, particularly among the domestic cyclicals that face an increasingly weak underlying domestic economy.
“There will be exceptions such as housing-related retailers and mining service companies. Overall however, companies are likely to remain cautious in respect of their outlooks, which may well disappoint investors who have bid up cyclical and ‘value’ stocks.
“The exception is the mining companies, which trade more on commodity prices than financial results. Here, earning estimates are not factoring in current spot commodity prices, and have room to continue to rise.
“As always, reporting season will be good for some, not for others. The divergence between CSL, which recently upgraded, and Brambles, which recently downgraded, shows that it will all come down to individual performances, regardless of whether they are big stocks, growth stocks or otherwise.”
He added that the outlook for the broader market is more muted, with performance hinging on the largest sectors – the banks and miners.
“Bank share prices have run strongly lately, with very little related to improving fundamentals, indicating limited upside from here.
“Meanwhile the miners look set to continue to benefit from elevated commodity prices, at least in the short term, although they are vulnerable to a correction in commodity prices on a longer term view.
“Otherwise, the market faces the risk of its rather bullish sentiment abating, as Trump-based excitement eases, and earnings expectations come back,” Mr Beaumont said.
According to Sarah Shaw, Chief Investment Officer at 4D Infrastructure, 2017 is looking positive from a global macro perspective.
“Virtually every major economy is either looking strong or is improving following a decade of sluggish growth.
“At the same time, there is a note of caution - the geo-political landscape will create significant uncertainty for at least the next six months as Trump assumes power and elections in Europe are held.
“However, global listed infrastructure offers an attractive investment opportunity in all market cycles, providing defensiveness with growth, and can be positioned to take advantage of all points of the market cycle.
“There is currently a good opportunity for infrastructure investors who can position themselves to capitalise on the macro while hedging the political – for 4D that means, going overweight on ‘user pays’ assets such as toll roads, while maintaining diversity across both utilities and user pays in all major regions of the world,” she said.
In property markets, there is also a divergence in the local and the global outlook, says Chris Bedingfield, Portfolio Manager at Quay Global Investors.
“The performance of real estate is driven by demand and supply imbalances and globally, supply in many markets is not a major concern and accelerating growth is positive for demand.
“Locally, residential supply will continue to boost earnings of related industry; however, medium-term concerns are increasing.
“The current levels of construction are well above long-term average and this is expected to place pressure on rents, then values. This cycle will take a few years to play out so investors will need to select their investments wisely.
“Contrary to many investors’ views, rising interest rates are not always bad for real estate – up or down movements rarely determine long run real estate performance. It’s worth noting that listed real estate in the US and Australia delivered competitive total returns during the last rate cycle. But as always, investment selection will be key,” Mr Bedingfield said.
Mr Beaumont added that the rotation from quality/growth/high-yielders to cyclicals/value has largely played out, and markets are quite balanced overall in their favouring of any particular style.
“As such, it will increasingly come down to stock picking. There are pockets of strength, but returns will deviate based on stock picking.”
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