What lessons have you learned from 2017?
Markets have grinded higher in 2017: volatility is low and the performance and correlation of high volatility stocks and low volatility stocks has been almost identical. There have been a handful of stocks that have performed strongly to the upside or downside, but the vast majority have traded in a highly correlated fashion.
Regulatory risk in Australia is on the rise: to date, 2017 has seen a notable increase in regulatory risk, with the creation of the Australian Domestic Gas Security Mechanism, further APRA lending restrictions and the Federal Government bank levy.
The Chinese economy has stabilised at a lower overall growth rate of 6.0% to 6.5%: the focus is now on broadening that growth to the services sector.
What are the key themes likely to shape the markets in which you invest in 2018 and how is this likely to impact portfolio positioning?
Interest rates are normalising: we are therefore wary of the interest rate-sensitive sectors of the market. Our view is that the retracement of bond prices has generally been a function of the normalising of a number of macro variables, including stronger US growth and a stronger US dollar.
Market valuations are high and volatility is low: in these conditions, markets are therefore vulnerable to geopolitical risks. The election of Donald Trump as US President has created some political turbulence and this will likely continue. North Korean provocation of the US through the launch of intercontinental missiles and nuclear weapons testing is cause of concern.
Domestically, consumer confidence and business conditions are likely to remain patchy as the economy transitions away from resources and will focus on opportunities that the transition presents. Sales data from REITs has shown weakness in comparable specialty sales as consumers remain constrained or opt for online shopping alternatives. The highly anticipated entry of online retail behemoth, Amazon, into the Australian market will likely give this trend further momentum.
Inflation should continue to normalise as commodity prices stabilise and the slack in the labour market is taken up.
Where do you currently see the risks within your asset class and where are the most compelling opportunities?
One particular area of focus is the battery industry. Many countries including France, UK, Norway, India, the Netherlands, Germany and China have taken significant steps towards moving away from cars with conventional internal combustion engines. We feel this is a secular trend that has the ability to drive structural change and believe there are opportunities in the Australian market.
While the market backdrop for equities is positive, growth remains scarce. We therefore remain focused on companies that are investing to grow their businesses and have a positive demand backdrop, such as Star Entertainment (Casino expansions and inbound tourism), Healthscope (Hospital expansion and ageing population) and Aveo (Retirement home developments and demographics).
By Janus Henderson Investors
Author: Lee Mickelburough, Head of Australian Equities