Shaw and Partners on the financial year ahead


by Jessica Amir

Shaw and Partners CIO Martin Crabb talks where markets are headed this financial year, what to expect for earnings season and what sectors to watch.

Jessica Amir: Hello I’m Jessica Amir for the Finance News Network. Joining me from Shaw and Partners is its Chief Investment Officer, Martin Crabb. Today we’re talking about markets, reporting season and what sectors to watch. Martin, thanks so much for coming back.

Martin Crabb: Great to be here.

Jessica Amir: 2018 financial year, we’ve seen markets hit a 10-year high, despite trade war fears, so much is going on. How would you describe what’s taking place in three sentences?

Martin Crabb: It’s a pretty amazing performance the last 12 months to June, market up 13 per cent, not too many people would have picked that. And that’s despite the two biggest sectors, or two of the biggest sectors, banks were actually down 1.5 per cent for the year. And telcos, which a lot of people own, was down almost a third for the year. So despite that the market was up 13 per cent. So all the other heavy lifting was done by those sectors that typically are selling stuff offshore. So miners, energy, healthcare and food and beverage companies, all up 30 to 40 per cent last year, so a pretty strong performance.

Jessica Amir: What opportunities do you see for Australian investors on the back of the US and Chinese tariffs?

Martin Crabb: That’s a good question and it’s a bit of a tough one too. Because there’s about $13.5 trillion of global trade and the sanctions, or tariffs that are being discussed between China and the US, could take the trade war disputes to a trillion dollars. So that’s a big chunk and that’s about 25 per cent of all US exports, as well. So it’s going to get nasty, or it could get nasty. So it’s very difficult to find winners in a war, in fact in trade wars, I don’t think there are winners.

The only potential companies that could do well are those companies that are avoiding the tariffs, or are being exempted from the tariff. Australia has been exempted from the US steel tariffs. So they could potentially sell more steel into the US, which would be positive. And another industry, which is small globally but quite big in Australia, is tree nuts. So things like almonds and walnuts.

California is the biggest exporter of those products globally. If they had tariffs put on them, then that opens the door for those companies. So Select Harvests (ASX:SHV) and Webster Limited (ASX:WBA) are two of the biggest nut producers. So there’s only a handful of companies I can see Jessica that actually win out of this trade war.

Jessica Amir: Turning to earning season now. What’s Shaw and Partners expecting in terms of standout stocks or sectors?

Martin Crabb: Again it’s been a pretty mixed market as we said at the opening, with telcos going backwards and so forth. But we think the profits of the market will grow somewhere around nine or 10 per cent for the year, which is a pretty good result. But it is very concentrated. So some things like technology and energy, so those two sectors. We think energy profits will double in the past 12 months, because the oil price has gone from US$40 to US$70 a barrel and also the technology sector. So we’re seeing more and more of it everyday, whether it’s payment systems or people using Cloud technology, or so forth. So we think those two are the standouts.

But in terms of individual companies and sectors, we think construction and engineering. So these sectors were bombed out a couple of years ago with the mining crash and so forth, but they’ve really bounced back strongly. So civil construction, engineering, infrastructure spending, those things are doing quite well. So things like Bingo Industries Limited (ASX:BIN) and maybe Emeco Holdings (ASX:EHL) would be two results I’d look out for.

Jessica Amir: When companies do release their results, a lot of them don’t actually publicise if they’ve met or exceeded, or failed to meet their results, their financial results. So how should investors really gauge if a result is positive or negative?

Martin Crabb: That’s a really good question and it’s one that we, even in the industry, really struggle with. So what has the market already baked in, or what has the market already pencilled in, as a result that is good or bad. And therefore, what is a hit or a miss. So this is really important to have a financial adviser or a stockbroker. Because typically a financial adviser or a stockbroker will have access to data, consensus data, that gives them a guide to what other analysts or what other investors, are thinking about a result. So when it comes in at 100 and the stock price falls five per cent, you look at the result and you go, that was up 20 per cent. That looked really good.

So obviously FNN does a fantastic job as well, with getting the company CEOs in shortly after the result, to talk through the numbers and give you a bit more colour. But again, you can see things move quite rapidly on the day. The market's normally right, but it doesn’t really give you a lot of time to work out whether it’s a good or bad result.

Jessica Amir: Over the past couple of weeks, the healthcare sector has been boding quite well. So for the financial year ahead, is this a sector that we should be eyeing or what do you recommend?

Martin Crabb: The healthcare sector has been one of the strongest performers and it’s mostly on the back of CSL Limited (ASX:CSL), which is the heavyweight, it’s almost five per cent of the index. That’s now through $200 and it’s up quite strongly. Can CSL continue to grow? We think it can, it’s got large addressable markets and it’s got quite dominant in its space. Will it continue to grow at the same pace? It’s hard to see that happening.

It’s also a little bit vulnerable, because the PE ratio or the valuation of CSL and other healthcare stocks is quite high. Because they have been industries that investors have been seeking, they’re high growth and global and I think that maybe things get a little bit tougher from here. So we’re still positive on the healthcare sector, but probably not as much going forward as in the past.

Jessica Amir: What other sectors should we be eyeing for the rest of the financial year?

Martin Crabb: We still like energy and materials. I mean they’ve had pretty good runs and there’s a few speed wobbles at the moment, with global growth starting to slow down a little bit, we think. But we still think energy and materials are probably the go to sectors. We’re starting to swing slightly back in favour to some of the more defensive sectors, because we do think the easy money’s been made. We talked about the year being a game of two halves, the first half being strong and the second half being a little bit tougher. We think that’s the case. So we think the banking sector's starting to look interesting. We don’t think you’re going to make a lot of money there Jessica, but we think you’ll do quite well.

Jessica Amir: What are your expectations for dividend growth?

Martin Crabb: Not that great, I think profit growth will be lucky to be five per cent next year. So you can assume that dividends will grow five as well, but there’re a couple of little nuances to this. One is the banking sector itself. The banks are all selling their wealth management and insurance businesses, and they’re quite capital intensive. So the capital that becomes available then, the banks can use that to increase their dividends or do buy-backs, or both.

So we could see some special dividends, maybe not in the next 12 months, but certainly thereafter from the banking sector. And another big company BHP Billiton Limited (ASX:BHP) is selling its shale assets. They might get $10 billion for that and that will come back as a special dividend. So we think normal dividends probably just plod along, but there might be some opportunities for other capital management initiatives.

Jessica Amir: Lastly Martin, what else should investors be watching out for?

Martin Crabb: I think the key word for us Jessica is diversification. That’s what we’ve been banging the drum on all year. We think things will get a bit trickier from here. We think people have made very good money in share portfolios in the past five, six or seven years. We think it does get tougher. So we want to make sure our clients are invested across asset classes, across sectors and across currencies, to make sure they’re very well spread, and they’re not reliant on one source of income, whether it’s property or term deposits. We really want to see them spread their investments broadly.

Jessica Amir: Thank you so much for your insights Martin Crabb.

Martin Crabb: Thank you.