Boy, wasn’t 2016 full of surprises?!
Right off the bat, it seemed like that rally in the price of iron and coal came out of nowhere. By mid-year, Britain had decided it wanted to leave the European Union. A few months later Donald Trump was elected president-elect of the United States, then Australia produced a negative quarter of GDP (two negative quarters and you have a recession).
There have been some dominant investment themes. First and foremost, historically low interest rates have fuelled property market enthusiasm. There’s also been a lack of enthusiasm among corporates to engage in capital spending, and a slowing down of the dividend cash splash of recent years. Finally, the mining boom has continued to fade – despite valiant efforts from China to prop up the country’s steel industry.
So how do I know what investments to avoid in 2017? I look at what the tide has brought in in 2016, and forecast or predict that that’s what’s going to be heading back out to see in 2017.
The one constant factor during the great east coast property binge has been low interest rates. It's pushed investors and regular mum and dad borrowers into the market when they might other have not been able to venture in.
I can't overstate just how "easy" borrowing has become. The official cash rate has now been sitting at a record low of 1.5 per cent for months. It’s been driven down the deep monetary crevasse in a blatant attempt by the Reserve Bank to stimulate the housing market and construction industry.
Last week, however, the game changed. Now all four commercial banks are independently raising the interest rates they apply to investor home loans.
ANZ was the latest of the big banks to lift investors loans in the lead-up to Christmas. ANZ's variable rate for investors is set to increase by 8 basis points of 0.08 per cent to 5.60 per cent p.a.
Last Monday the National Australia Bank said it would raise its variable rates on new and existing residential investor home loans to 5.5 per cent p.a.
The banks are doing it to cover their costs. A combination of higher funding costs, and a regulatory squeeze, have forced the banks to find some extra cash. There's probably also an element of safe-guarding their loan books.
So, in short, and I know you've probably seen this line before, but the 'era of low interest rates is now coming to an end'. In addition, I suspect the banks are targeting investors first because it's the area of the market most vulnerable to a correction or crash. From my perspective, therefore, investing in an already inflated property market is going to be more expensive, and riskier, than ever before. Think I'll pass.
There are a few great Australian stocks that boast great dividend yields. They include:Telstra, Westpac and the ANZ Bank. For the uninitiated, dividends are the income investors receive from their stocks. The yield is the “rate of return”. So, for example, if you were thinking about putting your money into a term deposit, and earning 2.5 per cent per annum, or buying a whole bunch of Telstra shares, and earnings 6.3 per cent, you would probably go with the latter.
There are some stocks that may increase their dividends in 2017, but I suspect the majority of companies will either hold their dividends steady, or reduce them.
You only have to look at a graph of Australian corporate profits. They have been trending down since 2012. Over the three months to September, company gross operating profits (ABS) rose a measly 1 per cent. Over the year to September they actually fell 0.3 per cent.
Now conventional wisdom has it that companies distribute dividends from company profits as a kind of “thank you” to ordinary shareholders. So why would companies increase their distribution of dividends in a low profit growth environment? Especially when there’s already been such strong growth in dividends in recent years.
Indeed, companies are also pulling back on capital expenditure. The latest gross domestic product (GDP) figures show a lack of capital expenditure actually took 0.5 percentage points off GDP growth in the September quarter. In other words, businesses ain’t keen to bulk up their businesses at the moment with heavy machinery and equipment. It’s not exactly “batten down the hatches” territory, but business is clearly in some sort of funk, and I don’t see that improving in the near term.
Stable dividend stocks are out there, but I don’t view this is an investment to dive into next year. You want your money to work hard for you, don’t you?
Mining and resources
Again, check out the stock charts for Australia’s two biggest mining companies: BHP Billiton and Rio Tinto. Fortescue (also leveraged to the iron ore price) is also interesting. They show declining stock prices from 2012 to 2015. Then, miraculously, in 2016, their fortunes reverse. Why? Commodities prices! Particularly the prices of oil, iron ore and coal.
I’m not going to go into detail about why the price rises of these commodities are unsustainable, but I think they are. The price of oil could be an exception to the rule, but iron ore and coal will, I think, pull back in 2017.
You only have to look at it logically. A key reason for the turnaround in the price of iron ore and coal has been China’s recent policy pivot – propping up the steel industry, rather than focusing on consumer-led growth. China’s debt load is already enormous, so whatever money it’s throwing at the industry has a finite life span. Restricting steel supply (which is also forcing prices higher), to curb pollution, is also a short-term policy fix.
Go for growth
2017 has the potential to be a challenging year for investors. National economic growth is likely to be patchy, and a Trump presidency will likely lead to volatile financial markets.
Areas of the economy that are expected to grow are health, education, and the public service. Wise investors will be looking to find investment avenues within these industries. It’s a time to be “defensive” in my view. You know sometimes the best offense, is a good defence.
David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.