Nicholas Grove: I'm Nick Grove for Morningstar.com.au and today I am joined by Morningstar's head of equities research, Peter Warnes, who is here to discuss his team's expectations for the coming year? Peter thanks very much for joining us today.
Peter Warnes: Thanks Nick, lovely to be here.
Grove: First of all Peter, what's your price target for the ASX 200 for this time next year and what factors do you think are going to drive and support the local market?
Warnes: Gee Nick, that's not a bad first ball. Look I am hesitant about giving targets on indices a year out. Let me just say this: I do think that the volatility will still be a constant companion through '15 as it has been for the last couple of years. Having said that, I do think the markets have got a chance to move forward.
I think it's been fairly easy to predict the markets going forward the last couple of years because QE was such a big influence on the markets pushing people out the risk curve and therefore equities were where they wanted to be. This time around there is lack of synchronization around developed economies and so it's much more difficult to make predictions. I would suggest to you that our indices, the ASX 200, could probably trade between where it is now around 5,100 and the top end, maybe around 5,700, 5,800. Where it sits this time next year, really I have no idea. But I do think that we've got a chance to move forward.
I think a lot of the bad news is already in the market. We've had these falling commodity prices, this latest slump in oil prices, bad confidence figures here. So, all those things should be in the market. Going forward, what can hold the market up or can be a positive influence on the market, I think interest rates are going to stay low and stay low for quite a while and therefore those sustainable yielding stocks will continue to be in favour.
And they are a big part of the market -- the banks and the Telstras and the supermarkets. Those type of companies, utilities to some extent, the unregulated utilities, a bit of infrastructure. They are heavy-weighted and so they can be a bit of a safety net for the market. The wild card is -- can we get some recovery in the resources and energy space through 2015 and lift that part of the market to give us a market that finishes kind of a little bit better. I think the chances of that happening are reasonable.
Certainly I don't think that the world is going to end in 2015, low interest rates are going to be the flavour of the year if you like and I think that people will continue to seek some safety.
Grove: Peter do you believe the recent rout in commodity prices is overdone and if so, how should investors be weighted when it comes to the energy and mining sectors going into 2015?
Warnes: Nick, a very good question. I mean, really what's happening in the resources and let's call it iron ore and energy obviously oil, the lessons are coming from supply side -- more supply into the market and the demand is little bit soft. Let's take a longer term view. As I said the world is not going to end in 2015. Look forward a little bit further than that and global energy consumption will continue to rise over the longer term.
Yes, there might be some soft patches in iron ore and what have you, but I do think that again global steel production will continue to rise, albeit at a slower pace than it has in the past. So the longer-term fundamentals are still positive for the space. It's just that we have this supply situation, which wants to if you like weed out the high-cost inefficient producers and that will happen. That's what happens in capitalism. And the big boys are flexing and when the big boys flex, there is some collateral damage and that's what you are seeing.
So, given that the long term is about moving to higher ground if you like on the demand curve for both resources and energy, therefore I think you are entitled to be able to be slanted a little bit towards them, because I think when you see charts disappearing down the chute, that's when I get a bit excited, when I say okay, yes it is difficult to catch a falling knife, but I want to know I'd like to see them buying into that kind of situation, rather than a chart that's going straight north and obviously will top.
So I think energy is giving you a very, very good chance now of buying well below long-term fundamental valuations. And Woodside and Santos are certainly doing that right now. Those companies are not going out the backdoor. Santos is not going out the backdoor, it doesn't need any more equity and the cash flow is just about to start. BHP is very, very well located in both the iron-ore and the petroleum space, and copper's holding up quite nicely.
And so those three counters I would think that at these kinds of levels, you are allowed to be at least market weight or maybe a tad over market weight going into or in the early part of 2015. Because I do think there is a good chance that it's over-bearishness at the moment. People are extrapolating from prices that are not sustainable and that means that -- these guys didn't predict the oil price to fall, but now they are all extrapolating about where it will go. I think there will be a turnaround in sentiment some time in 2015 and I'd love people to be there to capture it.
Grove: Also Peter where do you see the Aussie dollar moving over 2015 and which companies are going to be the main beneficiaries of this movement?
Warnes: Gee Nick I thought the first ball was pretty hostile. Look, the Australian dollar is symptomatic of what's happening out there -- I would say the supply side, terms of trade, all those things are going against it. Headwinds are buffering it. So you shouldn't get too concerned that it is happening. But there are two sides of the coin. I mean don't forget is it US strength or is it Australian weakness? Because we are not weak against everything, we are not weak against the yen.
So let's just make sure that we identify there are problems. I think the last thing that the Fed wants and Janet Yellen wants is for runaway US dollar. A runaway US dollar is not good for the US economy. And Glenn Stevens is jawboning the Australian dollar down -- well, he can get it down by cutting interest rates. But someone else has got to play the game with him because, as I said, there are two sides to the story.
Look, foreign investment, M&A -- all those things, attraction to Australian bond yields. Mobile capital will still be attracted to Australia and that's going to underpin the dollar. I mean I don't think necessarily that a 75-cent Australian dollar is all that good for Australia. It might really want to go there, but I think there are two sides to the story as I say. And I would be very, very cautious to say I am going to sort of plug in 75 cents into my models and that's where I'm going to be. I think you have just got to be a bit more circumspect about it and while the headwinds are strong and yes the momentum is against the Australian dollar, my gut feeling is telling me that it's not going to flush out completely and go into the low 70s. I don't know whether it's going to go to 75 either. I think you've seen M&A already coming out of the woodwork. All the foreign buyers will be there for infrastructure that the governments are selling, those types of things. So it's not all one-way traffic as far as I am concerned.
Grove: Peter thanks so much for your time today.
Warnes: Well, Nick thank you and I wish all our subscribers a happy and safe Christmas and a 2015 that's perhaps less traumatic in terms of the investment scene, but hopefully a positive year.
Grove: The Morningstar 2015 Forecast is available for Premium subscribers from the 19th of December. Over the end-of-year period Morningstar.com.au will still publish regular articles and research, as well as provide regular tools such as the stock and fund screeners and the portfolio x-ray. The Your Money Weekly newsletter will recommence publishing on the 16th of January.