As the financial year comes to a close, our experts look at what’s ahead in various sectors. Next up, Aussie equities overall.
Fund managers have witnessed fears around the arrival of Amazon and the introduction of the bank tax suck the oxygen out of the Australian share market this year, but one of the most serious concerns heading into 2017-18 lies with the financial health of leveraged consumers.
“No one feels that wealthy, even though house prices have gone up,” says Matthew Haupt from Wilson Asset Management.
Double-digit increases to power prices and out-of-cycle increases to mortgage repayments by the banks are coinciding with the puzzling persistence of the softest wage growth on record for Australians, even though the economy is close to full employment.
The S&P/ASX 200 Index finished 2016-17 with a return of 9.3 per cent on Friday, or 15.6 per cent including the benefit of dividends. Bullish predictions for 2017-18 are in short supply.
Dion Hershan from Yarra Capital Management does not agree with Scott Morrison’s $6 billion bank tax, which has elicited a similar $370 million grab from South Australia.
“It ticks all the wrong boxes — poor policy that’s been poorly executed, poorly explained and it sets a disturbing precedent. Banks are intermediaries, input costs like this should be passed on,” he says. Despite this, Hershan believes the case for owning banks remains strong.
View on property cycle
“Bank sentiment is poor and as institutions they remain polarising, but we believe the sector is resilient, represents good value and should be a large part of Australian portfolios,” he adds.
While the Reserve Bank of Australia cut interest rates in August 2016 to a record low 1.5 per cent, where they remain today, most economists think the RBA will stay on hold into 2018.
WAM’s Haupt believes to buy the banks at this point requires a view on the property cycle. Below-target inflation means there is no rush to raise rates in Australia but the US Federal Reserve is tightening policy and other central banks are sounding more hawkish.
“We’re at a real inflection point now around whether global growth delivers and how far central banks tighten rates,” Haupt adds “Central banks can get it wrong and go too hard and misjudge the strength of the recovery.”
Another dynamic that wove its way into the domestic market this past year has been the activist call to arms.
BHP Billiton is still wrestling with the demands of Paul Singer’s Elliott Management, which has emboldened other local hedge funds, such as Tribeca, to up the pressure on the miner too. The high-impact tactics deployed by another US short-seller, Glaucus Investments, culminated in a successful big short campaign targeting Quintis.
Market efficiency
“The Australian market is increasingly on the radar of global players and complacency will continue to be dealt with aggressively. Anything that aids market efficiency is good for investors in the long term,” said David Allingham from Eley Griffiths Group.
Yarra’s Hershan says activism is a “constructive influence” that helps with accountability.
“The key challenge is to make sure long-term and sustainable change is effected,” he says. “Short selling research reports are complicated — we are in favour of anything that improves transparency but too often the reports we see are blatant and self-serving efforts to manipulate stocks.”
Allingham also wonders whether investors are underestimating the Amazon effect over the long term on margins, but says the retailers that own their own brands and control their supply chain should still succeed.
“The only way the market can go up from here is earnings growth,” WAM’s Mr Haupt adds.