Behavioural finance tells us that, remarkably, most calendar years start with high expectations, a simple hope that the year ahead will be better. While we don’t question that optimism is an important attribute in life, realism is more important when investing.
The January effect has again been pronounced, with euphoria around Trump (we never thought we would be writing that!), growing excitement around further Chinese stimulus (again) and commodity prices surging to what are now peak margins in many commodities. Consensus ASX 200 EPS growth expectations for 2017 are now a staggering +12%, which must be close to some sort of record for an economy with 2-2.5% forecast GDP growth and rising unemployment.
Against this backdrop:
- Aggregate earnings estimates have been downgraded in 12 of the last 15 years (the average cut is 5%);
- Double-digit earnings growth hasn’t been delivered since 2011, which was a rebound from the dark depths of the GFC; and
- The vulnerability for 2017 appears to be in Resources where consensus is looking for 50% EPS growth and gravity-defying commodity prices to persist (Iron Ore +94% YY, Coking Coal +126%, Brent Crude +33%)
Our central view is that Australia remains stuck in an economic malaise, with both low growth and volatility likely to persist, national income to suffer from an unwinding of commodities prices and the cold hard reality of the environment likely to become increasingly apparent as the year progresses.
We remain cautious on the big thematics like the ‘Trump Trade’ and the ‘commodity renaissance’ and squarely focused on individual companies. In our view a selective approach to stock picking remains critical and, at a sector level, we continue to favour banks, telecom and healthcare stocks.