At recent AGMs many listed companies have been reluctant to provide earnings guidance into 2012 because they frankly have no idea what riches or travails 2012 will bring. This doesn’t lend everyday investors much confidence.
And if we talk to strategists and economists there seems to be diverging opinions around – between those who think that 2012 will be a bit of a whitewash to others arguing that come mid year a pick up will ensue.
The media is a flood with outlook articles for 2012, where well-meaning commentators telling us to buy financially healthy companies with solid fundamentals – as if investors would be seeking financially bad companies with weak fundamentals. This tells us nothing.
Basically, there are times in the cycle when big returns are on the tables and times when they’re not, and as we enter 2012, we might have to accept the latter. Buying stocks for dividends is one strategy we definitely should employ as we lean into the New Year (other investors will be doing it, which bodes well for share prices) while reducing risk across potential weak spots is another.
Weak spots include industries that could come under strain such as mining, retail (Myer, JB-Hi Fi), property-related industries such as construction (Boral, CSL). Weak spots also include residential property Australia wide, and long Aussie dollar currency plays. Emerging markets is also a potential weak spot, although some fund managers and bank economists are still wildly bullish for some reason or other, irrespective of the data coming out.
The economics team at Westpac Bank have reduced forecasts for China, India and emerging Asia for 2012. Westpac has lowered its 2012 China forecast for real GDP to 7.5% due to the international turmoil and the domestic environment, and has cut its India forecast to 6% in calendar 2012. As for emerging Asia, the banking team noted that “the information contained in the Q3 national accounts was uninspiring and in some cases downright troubling. We now expect East Asian growth to expand by a meek 1.8% in 2012.”
Remember also that emerging markets are by nature more risky than stgeloped markets, meaning investors require higher premiums for investing there. So when the growth pipeline gets clogged up, investors pull out quickly – sending markets flailing. You don’t want to be in an emerging market fund or ETF if this happens.
Now this isn’t an opinion shared by fund managers such as Fidelity however. Fidelity global chief investment officer for equities Dominic Rossi recommends that investors should be buying opportunities in emerging markets to boost their exposure at sold-down prices. “We believe that emerging markets will ultimately deliver better economic and stock market performance in 2012 than their overly indebted stgeloped counterparts. The long-term case for emerging markets is intact and the fact that we are in a ‘two-speed’ world in economic growth terms will only become more obvious,” he says. Amongst others, Fidelity runs a China, India and Asian fund.
On the flipside, one could say that emerging markets have further to fall than already sold off stgeloped nations like the US and Europe. As recipients of the bulk of investment dollars post 2008, emerging markets received more investment funds than ever before. But if the global flow of money pulls out, our newly stgeloping economies may find themselves rather short on cash. Investors don’t want to be in the same boat.
The other hotly contested subject seems to be commodities and mining. Is the mining boom over or will BHP Billiton’s share price, currently sitting at $35, be the bargain of the century when viewed in hindsight this time next year? If only we knew for sure.
As mentioned elsewhere in this newsletter, our big miners are not acting as though a slowdown is on the cards. Multi-billion dollar expansion projects in WA are in full swing. The argument put forward is that the urbanisation and industrialisation of stgeloping nations is expected to drive long-term demand for minerals and energy for quite some time (all booms have their underlying reasons, however, remember when the tech sector was going to change the world forever). The Australian Bureau of Statistics (ABS) noted that total private new capital expenditure for 2011-2012 is estimated at $158 billion, or 27% higher than the estimate for 2010-11. According to Lincoln Indicators Monadelphous Group and NRW Holdings are examples of companies that are milking the unprecedented level of new work in the pipeline. Lincoln also noted that gold miners like Silver Lake Resources are performing strongly with project expansion and exploration plans forecast in the current financial year.
Share prices of commodities-related stocks have been weakening. Increasingly, miners have been leading the stockmarket lower as weakening data comes out of China, Brazil and India. Over this calendar year our big miners have been miserable performers, BHP (down 23%) and Rio Tinto (down 27%), Fortescue Metals (down 30%), although there have been some solid performers still such as Monadelphous (up 12%).
At least there is one subject that most are in agreement and that’s the merit of buying high-dividend paying, established and well-known names next year. Most agree that getting your 9% fully franked yield on your Testra shares isn’t to be sneezed at. Other stocks offering yields just shy of 10% or slightly over, include Wesfamers, forecasted at 9% grossed up for 2012, QBE Insurance, Platinum Asset Management, ASX Limited, Westfield Group and AGL.
On that note, the winning bet for 2012 is to keep defensive and seek income plays. Emerging markets may be tempting but the risks are rising, and the same goes for commodities plays.