2018 yearly wrap, the sweet and the sour


by Jessica Amir

Bell Direct, Equity Strategist, Julia Lee and Fairmont Equities, Managing Director, Michael Gable talk about the macro issues plaguing markets, where growth has been found, and what stocks and sectors boded well in 2018.

Jessica Amir: Hi I’m Jessica Amir for the Finance News Network. Today we’re talking about 2018, the year that was, with Equity Strategist from Bell Direct, Julia Lee and Michael Gable, who’s the Managing Director of Fairmont Equities. Welcome back.

Michael Gable: Thank you.

Julia Lee: Always a pleasure.

Jessica Amir: So 2018 a very volatile year, markets saw the XJO hit a 10-year high back in August and we hit two-year lows, just recently. How would you guys sum it all up, starting with you ladies first?

Julia Lee: It was a difficult year and I guess the first three months of the year, we saw declines and then the last four months, we saw declines. If you just take the middle of the year, from April to August, the marker would have been up by 10 per cent. But unfortunately, the volatility means that the market’s down by around about seven per cent. I think more broadly though, it’s a macro issue that’s dominating investors’ minds at the moment. And that is, are we rolling over from a period of rising growth and rising inflation, to perhaps slowing growth and still rising inflation? Which is a much more difficult proposition for equity investors.

Michael Gable: Clearly it’s been a disappointing year, I mean when the market is down seven or eight per cent, you have to say that’s a disappointment. And as Julia mentioned, it’s all come in towards the end of the year. Trade concerns hitting resource stocks and the market in general. We’ve had rising US 10-year yields affecting the high PE stock. So not many sectors were immune from this recent carnage, so yes a very disappointing year for 2018.

Jessica Amir: Changing pace now talking about the best performing sectors. Looking at the chart, it looks like tech stocks, the smaller tech sector and healthcare have been boding quite well. What’s really fuelled this?

Michael Gable: With the health sector, in Australia it’s dominated by some big names like CSL Limited (ASX:CSL), ResMed Inc (ASX:RMD) and they’re still experiencing some great growth numbers, great margins, great market share. So at the end of the day, they continue to power on. In terms of the tech sector unfortunately it got derailed a bit towards the end of the year. But I actually think for next year that sector can bounce back, as investors go back to looking for companies with high growth.

Julia Lee: Most of the year has still been dominated by growth and unfortunately, it’s nothing really to do with what’s happened in Australia. It all stems from growth in the US. And if we have a look at the US S&P 500 sectors, the best performing sector has been healthcare. Still up by 10 per cent, despite the volatility and technology has been up by seven per cent.
Remember at the beginning of the year, we were talking about synchronised global growth, the S&P 500 has seen double-digit earnings growth, for six out of the last seven quarters.

So in that type of environment, you expect to see those growth names doing well. As growth rolls over, you start to see a shift into some of those more defensive sectors of the market. And I guess in more recent times, we’ve seen outperformance from things like property and consumer staples.

Jessica Amir: Let’s get stock specific, first up to you Julia. What stocks have been a real standout for you?

Julia Lee: If we have a look across the market, I guess the best performing stocks have been ones that have recently been included in the market. So despite the market pullback, we’ve seen Bravura Solutions (ASX:BVS) doing well, as well as Afterpay (ASX:APT). Both of these stocks are up by more than 100 per cent. And although they are substantially off their peaks, they have been great performing stocks. And we have seen this in the past, when new inclusions in major indices help to propel performance, and then we start to see fundamentals start to kick into the picture.

Unfortunately on the downside, we’ve seen a number of factors, both domestic as well as global factors. And I guess here domestically, we’ve seen the Royal Commission and that’s hit hard, stocks like IOOF Holdings Limited (ASX:IFL) as well as AMP Limited (ASX:AMP). And of course, the drought as well having an impact on stocks like Australian Agricultural Co (ASX:AAC), as well as Nufarm Limited (ASX:NUF).

Jessica Amir: What about you Michael, what have you favoured in 2018?

Michael Gable: In the first half of the year we were favouring resource stocks, materials, gold stocks, they were doing well for us. Obviously they got a little bit derailed in the last few months. In the recent pullback, we’ve started to pick up some of the growth names. So your CSLs, energy stocks have come back quite a bit, so they now look interesting as well, and I’m expecting those to lift up into next year. On the downside, obviously the banks with the Royal Commission, consumer discretionary stocks, I can’t see those improving anytime soon either. So clearly, there’s been a bit of a discrepancy between sectors in 2018 and that will continue into 2019, as well.

Jessica Amir: Earlier you mentioned the financial enquiry, which took a hit on financials, but consumer discretionaries also took a hit as well. Can you tell us what’s really been taking place?

Julia Lee: I think we’re seeing quite a lot of noise in the sector, because of the Royal Commission. And certainly there are going to be regulatory costs that will hit the sector, once we get the final report. But I think more important to think of, in terms of banks, is that they are leveraged to the Australian economy. And the signs are that domestic conditions are deteriorating. We’ve seen seven consecutive months of slowing new vehicle sales, as well as the weaker house prices and money supplied being at around about a 26-year low in terms of growth.

Now part of that is the prudential controls that we’ve seen. But altogether, I think things are pretty weak here domestically and I wouldn’t be in any rush, to get into some of those domestically focused sectors, like the banks or retail. Or even anything to do with residential housing.

Jessica Amir: Moving to strategy. Have you made any changes and if so, can you tell us what they were?

Michael Gable: At the moment, we’ve been picking up some growth stocks. I am looking at some of those high growth stocks that come back quite a bit, because I do believe they will outperform when market sentiment turns. And energy stocks, the oil price has come back quite a bit as we know. OPEC has made production cuts greater than what a lot of analysts were expecting. So again, when sentiment improves and it’s only a matter of when not if, they will outperform in my opinion.

Julia Lee: So we moved to a more defensive stand in the second half of the year, so we’ve been moving over to some of those defensive sectors like property. Not so much residential but more office property, which has been outperforming. So stocks like Dexus (ASX:DXS) and Charter Hall (ASX:CHC) have been a key feature there. But, when we have a look at slowdowns in terms of the market, the market reacts to the future. And if you have a look at the slowdowns in the market that we saw in 2015 and 2011; they lasted for about two quarters.

We’re one quarter through this slowdown, so we have at least another quarter, unless there’s an external shock or a recession, which could see it extended out to four quarters. So at the moment, I’d be looking at opportunities after the first quarter of 2019 and have a look at the market bouncing back. Unless there are signs that will see a further slowing and perhaps a recession, in which case I’d stick with the defensive stance.

Jessica Amir: Julia Lee, Michael Gable, thank you so much for coming by again. And thank you for watching. Come back in a couple of weeks time and Julia and Michael, will unravel what stocks and sectors to watch in 2019.