With the local stock market expected to closer lower today, taking a line through the Dow’s 315-point or 1.79% fall and given the SPI predicted a slide at the opening, I have two goals today.
The first is to explain what’s going on and why it has made our stock market so hard. Second, as a consequence, what looks like a sensible investment play for 2015.
Of course, I’d like the S&P/ASX 200 index to be where it was in early September around 5658, poised to accept the usual Santa Claus rally spike, which might have given me the slightest chance of making my 6000 call.
However, we are now around 5175. If you’re thinking I might be pondering the fate of a rooster before it makes a significant contribution to being a feather duster, then you’d be spot on.
To be honest, this has been a year of curve balls that have made tipping pretty damn hard. I might have foreseen Europe and China slowing down but Putin moving into Ukraine, oil prices slumping as OPEC tries to KO high cost rivals and the negative impact of Joe’s Budget on the economy was a huge bouncer.
I tipped the US recovery and those good old Yanks delivered. Thank God for that!
Meanwhile, I’d like to remind you that no one harassed the Reserve Bank more than me for keeping rates too high for too long. The current slow economy links back to then. I also chided Wayne Swan for trying to create a surplus at the wrong time in the cycle and then bagged my mate, Joe, for making the same mistake.
Our economy was slowing, thanks to China and the weakening mining boom, so we didn’t need another demand-reducer coming out of the Budget. And making matters worse, the media has been focusing on all our economic negatives while virtually ignoring pluses like the almost 170,000 jobs created so far in 2014!
OK, that’s enough belly griping about the past, which at least explains why the stock market didn’t deliver as I’d hoped. What about the future? I’m looking for my 6000 plus call next year and here are the reasons why:
- The US economic recovery will roll on, with The New York Times headlining with “US Retail Signal An Economy Beginning To Fire on All Cylinders”.
- The oil price, which is now spooking stock markets, will eventually push stock prices up with US consumers seeing a gallon of gasoline fall to $US2.62. That’s a fall of a huge 64 cents or nearly 20%!
- Each sustainable $10 drop in the cost of crude oil adds two-to three-tenths of a percentage point to GDP in the US. Other economies will benefit in a similar way.
- The above will be operating right around the world in 2015 with degrees, but it has to end up being a positive.
- The ECB will, and has to, do a fair dinkum QE program, with its cheap loans to European banks only having a small take up rate.
- PM Shinzo Abe in Japan has had a landslide win, and he has a big stimulus program for our second biggest export customer and the third most important contributor to world demand.
- The Shanghai Composite ignored stock market sell offs around the world last Friday and went up on expectations that its government will back both fiscal and monetary stimulus programs.
- All the above will boost global growth, which will help commodity prices start to defy gravity. And that will help both our stocks in the energy and iron ore business.
- Our dollar is likely to fall into the 70s and this will help many businesses.
- We’re in the third year of a US presidential cycle and this has seen rises 17 times in a row for a 17% gain.
- A lot of the US stock selling is end-of-year tax selling, where you sell stocks making the biggest losses. What stocks would that be? Well, try energy and materials and that’s why our stocks are copping it as well.
What to buy in 2015
I could go on but I won’t. It’s time for my selections for the year ahead.
Because I’m tipping the local market to see 6000 plus, the S&P/ASX 200 index ETF makes perfect sense. If we go to 6000 from 5200, that’s a 15% increase (plus dividends and franking credits).
Because I think a lot of small caps will benefit from a lower dollar, I like to rely on the smarts of someone like Geoff Wilson, so WAM Capital could give me some exposure to his clever market plays. And he pays good dividends — have a look here.
I’d like to tip stocks like CSL and Resmed, which we did before the dollar started dropping. We’ve already seen the best of these bounce-backs, though they will keep trending higher.
Also, if the RBA Governor gets his way and our dollar does fall to 75 US cents, then an ETF that incorporates the best companies in the world, excluding Australia, should not only do well because of an improving global economic picture, especially as we get into the second half of 2015, there should be currency gains. Some investors might just want to play the US and invest in, say the S&P 500 index via an ETF. I like the idea of an ETF or fund that targets great companies from all around the world for a bit of diversity.
I don’t expect the economic story to improve immediately but, by the second half, I’d want to be seeing some good economic headlines in Europe, China and even here in Australia. That said, I think Joe is going to have to go softer on his preoccupation with deficit and debt reduction for the sake of growth, jobs, profits and, ultimately, share prices.
One final tip for the thrill seekers – energy. Woodside, Oil Search and Santos are suffering now but could be surprise packages in 2015. And Woodside is also a pretty good dividend payer.
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