FYI | May 20 2015
By Peter Switzer, Switzer Super Report
The Budget brought a week where the stock market went up 100 points and companies such as Harvey Norman and JB Hi-Fi rode the $20,000 immediate tax write-off for small businesses. But what other companies will be stimulated to higher levels, thanks to Joe’s Viagra Budget?
Picking green shoots
The wider implications and multiplier effects of this Budget have been underestimated and many are ignoring the green shoots I’ve been pointing to for over six months – such as job ads going up 11 out of the past 12 months. Then there’s the building boom, with dwelling approvals at all-time highs. And retail has gone up 10 months on a trot. Adding to that, we saw how retail stocks reacted to the Treasurer’s gift to small businesses with turnovers under $2 million.
The only damn fly in the ointment is the Oz dollar and that will be a barrier to better stock prices until the Fed is close to raising interest rates and/or the RBA comes out with another rate cut, which is becoming increasingly likely with the Oz dollar having traded over 80 US cents. It hit 80.37 US cents but what do you expect, with every country out there trying to keep their currency down to get the old J-curve effect that Paul Keating talked about in the mid-1980s.
That’s what we’re missing out on — the big export and economic impact of a lower dollar, though it would be starting to creep through as our dollar has dropped from 95 US cents to around 80 US cents in 10 months!
But if we can get it down to where the RBA wants it — 70 US cents — then it will be a bonanza for dollar-sensitive stocks, the stock market index and the economy’s growth, which will be good for jobs.
The good buys
I’m investing for that time, so what investments look like good buys right now for that time?
I like the Vanguard Australian Shares Index ETF (VAS), which tracks the ASX/S&P 300 index as companies in this index not only include some of the smaller companies, that still need to follow the big companies, it also includes companies that will be beneficiaries of the lower dollar when it comes through.
On the dollar companies such as CSL and Macquarie, they will have a surge when the dollar heads south and while there will be the odd shock, such as Resmed’s disappointing trial that hit its share price, generally the lower dollar play will makes sense.
I still like the banks and let’s take CBA as an example. It’s all-time high not long ago was $96 and it’s now around $83. The S&P/ASX 200 index is around 5700 and I bet within a year we are heading towards our all-time high of 6800. History shows that we beat our old all-time high before another crash, so let’s believe in history.
So if the index goes to 6800, that’s an 1,100-point gain or a 19% gain! That’s why I don’t mind playing the index but on CBA, if the index goes up 19%, I’d be surprised if the biggest bank would not go up 10%, especially if the Budget produces economic growth and jobs. Throw in the 5% dividend and the franking credits and I think a 15% plus gain from CBA over a year, or year and a half, is not bad bananas.
Obviously, building is set to keep doing well and so the likes of Boral and CSR should be beneficiaries. And I think the run up for the likes of Harvey Norman and JB Hi-Fi is not over yet.
And don’t ignore the foreign play. It has nothing to do with Joe’s Budget but if that dollar follows the script an ETF such as the FTSE All-World index excluding the US (VEU), has appeal. I also like iShares Europe (IEU) as I think as Europe improves, the euro will go up as our dollar might be sinking but that’s a harder game to predict.
Believing that the Budget will create growth, profits and higher share prices is not a silly strategy. And believing our dollar will fall is also a sensible view and so your strategies now should be designed to cash in on a future that is running late but will happen.
Bonus picks
Finally, two companies that a lot of my contacts keep mentioning are IRESS, which should benefit from a rising stock market and Challenger, which also should be well placed as markets keep rising and bond yields improve.
If Joe’s Budget hits the growth targets he’s looking for, and economists such as CommSec’s Craig James and JPMorgan’s Stephen Walters are actually more bullish than Treasury, then my index guesses and stock speculations will be on the money.
But remember, always buy good companies — hold 20 if you can to spread your risk — and make sure they’re companies you can hold in bad times as well as good times.
One last story to prove my point. Let’s assume that Harvey Norman is a quality company. If you bought it before the 2007 spike, you might have got it at $4. It spiked to around $7 before the GFC and went under $2 after the GFC market crash. If you bought it then, because it was a quality company that should have come good, you’d be up 150% on that purchase in seven years. Sure, Gerry has been stingy with dividends and that’s why I prefer quality companies that pay dividends but the quality company characteristic comes first. Never forget that.
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.
