SMSFundamentals | Sep 19 2014
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[This story was first published for subscribers on September 12 but is now opened for general readership.]
By Greg Peel
Investment advisor Crowe Horwath notes the pace of global economic, social and technological change and the variability therein is impacting on different countries, sectors, industries and individual businesses differently and will continue to impact on Australian households and investors.
Infotainment and online shopping are the new normal, for example, hence traditional media and retail businesses are struggling to keep touch. There is a new burst of development in the biotech space, often connected to another new development – 3D printing.
While economists expect China’s economy will have grown 7-8% in 2014, the nature of that growth has evolved from a decade ago when the Chinese economy was export-driven to a greater focus on domestic consumption and benefits for all, including clamp-downs on pollution and corruption.
Europe remains a basket case but the crisis has subsided, and talk of the eurozone fracturing has quietened. Budget deficits have begun to fall in many eurozone countries. Japan faces a demographic challenge in the form of its declining population but economic prospects are improving as the government moves to ensure low interest rates and a lower yen. The US is on track for 3-4% growth in 2014. Profits are rising to record highs again, supported by low interest rates, and are expected to rise again in 2015.
The GFC has faded into memory, and with it further fears of impending financial disaster. Geopolitical fear has risen to take its place. General political uncertainty (See for example: US Congress; Australian parliament; Scotland) is also imposing itself.
Australian corporate profits have returned to new heights but individual company and sector earnings have been fragmented. The Aussie dollar has remained stubbornly high [this is possibly in the process of changing] but exports have lifted to record highs in volume terms for mining, agriculture, services and inbound tourism.
Domestically, housing construction has lifted but retail spending and non-mining investment remain weak. Employment is solid (despite earlier fears) but wages growth has slowed.
Taking all of the above into account, Crowe Horwath has listed its “Ten Best Investment Ideas 2014”, with those investing for, or in, retirement as the focus.
(1) Don’t be distracted by what the other bloke is doing. Concentrate on what is relevant and valuable to you and your own personal objectives. Do not look for short term solutions “to make a fortune”.
(2) Seek professional advice. [Note: FNArena would expect an investment advisor to say nothing less but as a source of information itself, FNArena concurs that to tailor investment solutions in this liquorice all-sort world of investment opportunities, one best tap the knowledge of those who do this for a living.]
(3) Invest in inevitable technological change, focusing on Australian market leaders with a global presence that redeploy capital into R&D. Some industries are changing rapidly while others are slowly evolving. Solid R&D spend can lead to longer term payoffs. CSL ((CSL)) is one such example of a slow moving high achiever remaining competitive globally.
The ongoing adoption of online capabilities and cloud computing, aiding financial services businesses and positioning for the exploitation of “big data”, is an emerging theme.
(4) Dominant online businesses have generated positive outcomes and may still enjoy further longer term growth with controlled costs and solid margins. Many are nevertheless now expensive. The focus should be on market leaders boasting large market share and strong brand awareness.
You are no longer a demographic retailers are targeting. Service to younger demographics through a variety of mediums will continue to grow a-pace. Online trends are leaving traditional retail behind.
(5) Politicians continue to fiddle with retirement age, universal health and superannuation laws. The onus of responsibility is likely to fall less on the public purse and more on the consumer as time moves on.
(6) China’s middle class is growing, supported by wage growth. Retail sales growth is outstripping economic growth, encouraged by Beijing’s policies directed at stimulating the domestic economy. The Chinese want to experience The West and all its luxuries, both at home (imported goods) and through travel (to Australia, for example). When travelling they want to experience the local produce and pastimes.
Quality Australian businesses are well set to benefit from this evolution. Takeovers in this space are likely to become more frequent. See: Treasury Wine Estates ((TWE)) or more specifically in that particular case, Penfolds wines.
(7) Investment in international shares has been a successful strategy to date with the support of Aussie dollar strength. Opportunities are nevertheless now becoming more difficult to find (eg US at record highs). More conservative positions may now be worth considering where earnings profiles are relatively resilient to market downside, but a further opportunity is offered if the currency does start falling.
[Note that all else being equal, an Australian investor in US stocks will profit from a fall in the Aussie dollar. DO NOT make the mistake of assuming “the Aussie dollar” is anything other than the AUD-USD. The Aussie-euro and Aussie-yen, for example, are completely different beasts, albeit all currencies are inexorably linked through currency cross-rates.]
(8) Interest rates in general are likely to remain low for some time, further encouraging investment in yield. Do not chase yield for yield’s sake. The higher the yield, the higher the risk. Avoid yield that is not backed by cash flow. Companies offering lower yields but solid earnings growth (which implies higher quantums of distribution through time) are a safer risk/reward prospect than those offering high yields on dubious earnings outlooks.
(9) Listed property and infrastructure funds/companies have proven valuable investments to date on the back of consistent income distributions. As with (4) above, valuations for many are now full and suggest a more cautious approach, which brings (8) into play again. Balance sheets are nevertheless now sound and lower interest rates provide opportunity for refinancing at lower debt costs.
Steady and slow growing income should continue from these asset classes, making them the “new annuities”.
(10) The banks have had a very strong run to date, offering higher returns on equity than global peers and valuable franked distributions for domestic investors. The outlook now nevertheless suggests caution as Australian economic growth slows, although the local regulatory and capital environment should see market share retained at relatively high levels, with stable margins suggesting positive longer term growth.
On valuation grounds, Crowe Horwath is comfortable in trimming overweight positions.*
*[See also- Australian Banks: Is It All Over?]
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