Bell Direct Equity Strategist, Julia Lee and Fairmont Equities Managing Director, Michael Gable unveil what to expect from equities in 2019, covering the banking Royal Commission wrap and what stocks and sectors to watch.
Jessica Amir: Hi I’m Jessica Amir for the Finance News Network. Thanks for tuning into our special series on what stocks and sectors to watch in 2019. Today I’m with Julia Lee, Equity Strategist from Bell Direct and Michael Gable, Managing Director of Fairmont Equities. Thanks for coming back guys.
Julia Lee: Thank you.
Michael Gable: Thank you.
Jessica Amir: So 2018, we caught up with just a little while ago. 2018 a very volatile year, hitting a 10-year high and then swinging down to two-year lows. What can we expect for 2019? Starting with you, ladies first.
Julia Lee: We finished 2018 with a pretty difficult time on markets and when markets are difficult, investors tend to think it’s going to go on for a long time. But if we have a look at what happened in terms of the market in 2015 and 2011, the downturns that we saw in both of those markets, only lasted two quarters. And in fact, usually when we do see downturns, it’s around about two quarters, unless there’s a recession. Where then it’s usually extended to around about four quarters.
I guess the general rule is that the market tends to react to things, before it’s actually happened. So even if we do see a recession, the market’s already pretty much reacted to that recession. And the time to look at buying is around about six months into the slowdown, before the recession’s actually ended. So I guess 2019 is all about positioning around opportunity, because the downturn’s only likely to last a few more quarters.
Michael Gable: I think 2019 will be a positive one for equities. So at the moment, the consensus is factoring in a possible recession in the US, but the facts don’t support it. Inflation is quite benign, 10-year yields in the US are starting to come back now and all these things are fairly supportive of equities. So I think the risk is that the consensus is wrong and the risk is to the upside, and we can actually get a fairly decent rally from here. Of course, I look at the charts for the markets as well and at the moment, I am seeing support down at these levels.
So it will be a year to position, reposition that is. We are late cycle, but I think the market will be quite surprised at how that will probably end up getting extended longer, than it thought it would have gone on for. So again fairly supportive for equities, supportive for growth stocks.
Jessica Amir: Changing pace now. Early this year in 2019, we can expect the Royal Commission to hand down their findings, we saw financials sharply sold off in 2018. Do you think that equities have really factored this already in, or do you think that investors will continue to sell down?
Julia Lee: I think if you have a look at financial stocks and banks in particular, it hasn’t just been the Australian banks that have been sold off over the last 52 weeks. We’ve seen UK as well as US banks, losing between 15 to 20 per cent. So I think it’s more symptomatic of what we are seeing on a broader macro level. And that is that interest rates have been moving around and in particular, moving down on the shortend of the curve. So the theory is that we are going to see margins coming down, in terms of the global banking industry and unfortunately, it is a global banking space. And especially Australian banks are vulnerable to global funding cost.
The Royal Commission, I think it’s a bit of noise. Yes there are going to be higher regulatory costs, but banks have already started to do the work there. The bigger thing for the banks domestically is a softening, in terms of the housing market and mortgage lending growth.
The last two decades almost every single year, mortgage-lending growth has been double digits and now the banks themselves, are predicting four to five per cent growth. That’s a huge adjustment and a much more difficult environment, for banks to grow their profits. And I think it’s going to be more about cost cutting, in order to maintain profitability than growth.
Jessica Amir: Now to what stocks and sectors we should be eyeing in 2019?
Julia Lee: We ended 2018 looking at some of those defensive sectors, things like property as well as consumer staples. And I think the first quarter of the year, there will still be a defensive tilt and in terms of the property sector, just moving towards those stocks, which are exposed to Sydney office. The great thing about property stocks is that they’re multiyear leases and as those leases come to an end, you see that repricing effect. And Sydney office property rents have been quite strong. So stocks like Dexus
(ASX:DXS) as well as Charter Hall Limited
(ASX:CHC), continuing to do well in that type of environment.
2018 we saw a drought, but the time to think about buying those drought-affected stocks, is pretty much in the middle of the drought. So having a look at stocks like Nufarm Limited
(ASX:NUF) once again, as well as maybe Australian Agriculture Co
(ASX:AAC). And then I think the second half of the year, it will be all about refocusing in on growth and picking up some of those growth names that you did like. But I don’t think there’s going to be a rush in the first half.
Michael Gable: We believe 2019 will be good for equities with long-term interest rates, not rising as quickly as a lot of people expected. And growth, yes it’s not going to be as high as it was in 2018 for the US, it’s still at a fairly decent number. So we believe that’s a nice sweet spot for equities and they’ll continue to do well. So we’re looking at cyclicals, we’re looking at resources. But we are still fairly late cycle, so my tip to investors is to look more for the large cap stocks, rather than the small caps. Because there might be liquidity issues towards the end of the year, as it starts to become a bit of a crowded space.
Jessica Amir: Thank you so much for your insights Michael Gable and Julia Lee, thank you.
Julia Lee: Thank you.
Michael Gable: Thank you.
Jessica Amir: And thank you for watching.
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