FYI | Nov 08 2017
By Peter Switzer, Switzer Super Report
Oz stocks: Is the best contrarian play now simply going longer?
If you’ve missed out on the investing overseas boom, the question is, is it too late? And a better question might be — is the best contrarian play to go longer on local stocks?
You know, we’ve been harping about home for income and overseas for growth in this Report for a few years but with overseas stock markets in record territories, is it time to believe that our market will play catch up?
I think between now and mid-2018 the US market has upside potential because, as I pointed out last week, the past three big bull markets saw the S&P 500 index go up between 350% to over 500%. The US market is up about 220% since it beat the nerves from the GFC recession.
These bull markets lasted around 150 months and the current one is only about 116 months old, so it could be around for another three years!
That said, I think we will play catch up and here are the reasons:
- This AFR headline: Business upbeat about wage growth over next year
- This AFR headline: The mining boom is back as profits double
- Craig James of CommSec calculating that the infrastructure boom will be one and a half times the past mining boom!
- The Aussie dollar is at 76.45 US cents and I expect it to go lower once the Fed raises interest rates in December.
- The solid US job numbers over the weekend, with the CME Fedwatch tool pointing to a 96% chance of a rate rise in December. “Despite coming in below expectations, [261,000 not 310,000 as predicted] this is the type of report the Fed was looking for to sign, seal, and deliver a rate hike in December,” said Mike Loewengart, vice president of investment strategy at E-Trade Financial.
- The world economy is growing in sync for the first time in over a decade.
Many who complain about our ordinary performance on the stock market since March 2009 forget how well our market did compared to the US after the dotcom bust. We were criticised as a bricks and mortar economy in the mid-late 1990s but when the bust happened we were less exposed to the silly investments and bankruptcies that followed when smart people realised that many of these hi-tech ‘businesses’ were all talk and no revenue, let alone profit!
We also had tailwinds from the mining boom, which started around 2003 and started petering out three years ago. It not only helped mining’s contribution to GDP but it hurt lots of other industries/businesses that had to deal with an Aussie dollar that went as high as 110 US cents!
When WA was flying high on China’s demand for our resources, states like New South Wales and Victoria were close to being in recession! Recall when Treasurer Wayne Swan used the term “a patchwork economy.”
Then we had to cope with the collapse of the investment part of the mining boom, which has seen adjustments such as a lower Aussie dollar, a weaker WA but a stronger NSW economy, where the jobless rate is at a nine-year low. Meanwhile, a housing boom has partially replaced some of the demand that we once got from having some of the best miners in the world but economic growth has suffered, despite looking likely to come back higher sooner rather than later.
Craig James recently looked at our 4.5% jobless rate and observed: “The job market is in good shape and all the leading indicators remain positive. Job vacancies are at record highs while job advertisements are just off 6½-year highs. Business surveys are also positive with the NAB business conditions index at the best levels in nine years.
“The missing ingredient at present is wage growth. Wages are growing at a slower pace simply because businesses find it hard to lift prices in an era of global competition. But it is important to note that slower wage growth is a global phenomenon. And wage growth is still outpacing prices, so the real wage growth is supporting spending. Just like the Reserve Bank, we expect the job market to tighten further over the coming year and this will serve to lift the growth rate of wages.”
But as the AICD noted and as Deloitte Access Economist Chris Richardson has predicted, wage rises are on the way in 2018.
This should underpin better consumer demand and, as you can see, there is a strong case to believe we will see some better stock prices over 2018 and 2019, especially as the greenback heads up and our dollar drifts lower.
We should also see rate rises next year and that will help get the banks out of the doldrums but there is also a nice seed planted for the banks. Interviewing David Murray last week, he says banks need to see more business borrowing and I think the following pieces of economic data makes this very likely. First, despite the silly citizenship crisis in Canberra, business confidence is above its long-term average and business conditions are at 14.3 but the long-term average is 5.2!
Second, business profitability is now at a 9½-year high of +16.9 points!
If the data and the likely course of the dollar were telling me different stories, I’d remain cautious on the local stock market but it has recovered nicely since I recently tipped it would, and the most recent run of numbers tells me this looks like a nice contrarian play worth sticking with for a couple of years.
Keynes has been credited as saying to a critic, who noted a new view from the great economist: “When the facts change, I change my mind. What do you do, sir?”
Right now, the facts say: “Go long Aussie” but if the facts change, I will let you know.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
