Bell Direct Equities Strategist Julia Lee and Fairmont Equities Managing Director Michael Gable talk about the outlook for the Australian share market in 2017 and what stocks and sectors are likely to perform under a Trump presidency.

Carolyn Herbert: Hello. I'm Carolyn Herbert from the Finance News Network, and joining me from Bell Direct is Equities Strategist Julia Lee, and from Fairmont Equities, Managing Director Michael Gable.

Julia, Michael, welcome.

Michael Gable: Thank you.

Julia Lee: Thanks. My pleasure.

Carolyn Herbert: Julia, starting with you, 2016 was a tumultuous year for equities markets, particularly with Brexit and the election of Donald Trump, so how would you sum it all up?

Julia Lee: Overall, the performance of the market was good, up by 7%, but it really depends on what sectors you're overweight in. For example, the Materials sector, which has heavyweights like BHP and Rio Tinto, it was up a massive 39% for the year. But overall I'd sum it up by saying it was the start of a bull secular market, so any pullbacks were really opportunities to buy into the market, and we saw that with Brexit as well as Donald Trump winning the US Presidency. So, when we did see the market nervous and pulling back, that was an opportunity for investors to get in.

Carolyn Herbert: As you say, Julia, we are in a bull market. US markets are at all-time highs. So, do you think the ASX 200 is going to hit 6,000 again?

Julia Lee: I think it is looking bullish for the Australian market in 2017. The outlook for Commodities as well as Financials stocks is looking good. And, for the first time in a long time, we're not talking about deflation or disinflation. In fact, the question has become how to deal with inflation in 2017. So, that type of backdrop is good news for investors, particularly to some of those higher beta areas, like the Energy, Materials sectors, which are already doing well, as well as the Industrials sector.

Carolyn Herbert: So, what macroeconomic factors do we need to watch out for in 2017?

Julia Lee: Well, obviously, President Donald Trump is an unknown at the moment, and the details of his policy for the world's largest economy is going to have a huge bearing on investor sentiment as well as the outlook for the share market. So, that's going to be number one. Secondly, China's the second-largest economy in the world. It's growing at about 6.7% at the moment. And, really, it's been stimulus that's helped to support that growth. So, are we going to continue to see that support coming through? And then, thirdly, I guess the macro events. We do see elections in Europe, particularly for France as well as Germany; and what we've seen over the last 12 months is things not going to the market's plans or expectations. So, that could bring a little bit of volatility to the market.

Carolyn Herbert: And now to you, Michael. Commodities have made a stellar comeback in 2016. So, do you expect more of the same this year?

Michael Gable: I am expecting Commodities to do well, especially in the first half of this year. What we're seeing at the moment is President Trump coming in, potentially increasing fiscal spending, which should stimulate economies. We have seen China stabilise, and it's actually doing quite well at the moment. We did see PPI numbers last week, the best that we've seen for five years. So, I think that there is enough there to support Commodity prices, and Commodities stocks can continue to do well -- as I said, especially in the first six months of this year.

Carolyn Herbert: And, Michael, the big banks are certainly back in fashion following the election of President Trump. Is there a standout for you, and what are you expecting from the Financials sector this year?

Michael Gable: The Big Four banks in Australia, especially in the last two months, have had a fantastic run since the US election. I am expecting the banks to do well this year; even though, in the short term, they have run a bit hot. So, they should come back from here. But, ultimately, in an environment with increasing GDP and a potential increase in bond yields, that can be a positive for our banks. In terms of a standout, I think all four can do well this year, but, beyond that, we might need to be a little bit wary of Westpac and Commonwealth because of their exposure to the East Coast property market. As we know, if interest rates start going up -- we're talking next year and the year after -- that can put a bit of stress upon their mortgage book.

Carolyn Herbert: So, Michael, under Donald Trump's Presidency, which other sectors do you think will flourish this year?

Michael Gable: Cyclical stocks should start to do well this year due to the increased spending and increased potential GDP worldwide. Also, any stocks that have US dollar earnings. So, if we're expecting the US dollar to appreciate over the course of this year, then Aussie stocks with US dollar earnings can do well. On the flipside, we also just need to be wary of stocks which are exposed to rising bond yields. So, the bond proxies and the infrastructure stocks, the property stocks - those that did well over the last few years may start to, well they've already started to suffer, but they may well continue to suffer during 2017.

Carolyn Herbert: And finally, Julia and Michael, what are a few stocks we should be watching out for in 2017? First to you, Julia.

Julia Lee: Well, I think one of the big themes of 2017 is going to be rising interest rates, so stocks with exposure to that, like QBE Insurance, as well as Computershare. And, look, when you get inflation, Commodities usually do well in an inflation environment. So, ‘Doctor Copper’. I'd be looking at stocks like OZ Minerals. Sims Group, which has the upside of higher steel prices without the higher import costs, because it's scrap metal. And also Galaxy Resources, which is going to have a transformational year where it looks at production of lithium. And one last stock - A2 Milk; I guess the combination of the valuation as well as the growth story there.

Carolyn Herbert: And what are your thoughts, Michael?

Michael Gable: Well, a lot of the stocks Julia's mentioned do exist in sectors that I'm looking at as well. So, I won't hang my hat on one particular stock, but the advice I would give investors is really keep in mind those big macro events. So, I liken it to about five years ago, where we had a situation where interest rates started to head back down, we were still in the thick of quantitative easing, the EU was doing whatever it takes, and we had this huge shift away from some sectors to other sectors. So, my advice to investors is be aware of this big shift that's now happening with rising bond yields, and, you know, really focus on that, and don't try to take too long to react to that. And, as Julia mentioned, there are some, you know, new stocks, new sectors which are going to benefit from that, and investors should definitely be aware of that.

Carolyn Herbert: Some good points there. Julia Lee, Michael Gable, thank you for your time.

Michael Gable: Thank you.

Julia Lee: Thanks, Carolyn.

 

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