Nicholas Grove: I'm Nick Grove for Morningstar.com.au, and today I am joined by head of equities research, Peter Warnes, who is here to discuss the Your Money Weekly Biannual Forecast.
Peter thanks for joining us today.
Peter Warnes: Good to be here, Nick. Just got through the snowstorm.
Grove: First of all Peter, where do you see the ASX 200 sitting in six months' time and will volatility still be our "constant companion?"
Warnes: Nick, volatility will still be our constant companion -- no doubt about that. There are too many influences out there from all corners of the globe that are impacting global financial markets and we're part of it. And so yes, we'll have to deal with volatile conditions for some time to come.
In terms of where the ASX 200 might be in six months' time, I don't like to really put numbers on indices, but I do think there is a better-than-even chance the markets will tend to drift higher. I just don't see any significant problems on the horizon, despite the fact the US will increase rates later in the year.
There is some traction in the domestic economy -- employment is very, very "sticky" if you like. And there are a couple of reasonable signs there. So I think the markets and the Australian market will drift a little higher -- nothing spectacular. Let's be honest, the halcyon days of double-digit returns are well and truly over and settle in for a period of mid to high-single-digit returns for the next few years.
Grove: Peter, the recent Chinese share market correction and all the discord in Greece will still be playing on investors' minds. But how important is it for Australian investors to pay attention to these influences?
Warnes: Nick, you've obviously got to pay attention to them. But how much attention and how much should you place on what you should be doing with your portfolio? Portfolios we try to construct for our investors and subscribers have a long-term nature. These things are short-term spikes and when you look back in five years' time, you will say, "What the hell was that all about?" And you'll come back and say, "Yes, that was Greece and that was the Chinese shakeout in the market". But the markets over time like I keep saying, 95 per cent of the time they are either consolidating or going up and the other 5 per cent they are spiking. Well, I'd rather concentrate on the 95 per cent than the 5 per cent.
Having said that, the Greece thing has been blown out of all proportion in terms of media coverage. It's been headlined to the point of distraction. The Grecian vase has been kicked up the road to Corinth and whether or not we're back here in three years' time is a moot point. All I can say is that I wouldn't place too much importance on it. I'd be much, much more focused on the improving trends that are occurring in the Eurozone. Current account surpluses are now almost right across the continent. The weaker euro and these input costs, particularly oil-sensitive input costs, are making some of those big chemical companies and resin companies very competitive and they are going to do very, very well. You saw last night, new vehicle sales up 14.8 per cent in Eurozone. I mean, these are numbers that people should be focusing, not the Greek debacle.
In China, it's a bit of a different situation because we're much closer there and we think everything in China has got to affect Australia and to some extent it does. But again, that stock market is the "mainland Macau" if you like. At this point in time, there's a huge disconnect from what's happening in the economy -- the economy is still going at round about 6.5 per cent to 7 per cent, continued strong numbers, industrial production double-digit there, sorry industrial production about 6 per cent.
Fixed asset investment is still strong, rebalancing more to the consumer. It will take a little time. Let's not get carried away with what's happening in a very, very speculative Shenzhen market. Longer term, as China rebalances and the consumer becomes the powerhouse, that economy and that market will do quite well.
Grove: Peter, Fed chair Janet Yellen seems pretty committed to raising rates this years. What implications does this have for Australian investors?
Warnes: Nick, September looks like D-Day if you like and we could look for a modest increase in the Fed funds rates from where it's sitting now 0 to 0.25 to 0.25 to 0.5 and it looks like that the rate will finish there roughly around that number by the end of the year. And look, it's been so well-telegraphed to the market that the market should not be concerned.
More importantly, she has emphasized that subsequent increases and the trajectory of increases after the initial increase will be gradual and she has reiterated that time and time again -- only a couple of days ago in the semi-annual Congressional testimony. So look, the market should be well and truly locked into that. Will it affect the Australian investor and what will it do here?
Well, as interest rates drift up over there and we're drifting nowhere but flat to down -- and you just saw Canadian rates just cut and New Zealand's rates cut -- I suspect we might have a cut here. Then that means the currency movements could start testing again and therefore the Australian dollar weaker against the US. That's not to say it will be weaker against the euro or the yen. But I suspect certainly against the US dollar it will drift back towards $0.70 mark over the next six to eight months. Now that affects the Australian investor. He should be looking now to have a bit more of his portfolio US-dollar-facing. You could have income here and look for growth offshore and US-dollar-facing growth is a way to play it.
Grove: Just finally Peter, what sectors and companies should investors have a decent weighting towards as we head into fiscal 2016?
Warnes: Nick, again taking up on the theme of widening gap in the currency. Certainly we've got to look at those companies that are our global companies that have a lot of US dollar revenue and earnings. And therefore the healthcare space is a place to have some focus -- the CSLs, ResMed, Ansell -- those three stocks we like at this point in time. They have come back in their green zones and so we encourage you to look at them. The Ramsays and the Sonics are still expensive and just look for spikes down, and if they come into the green zone, take advantage of them. But the healthcare space, obviously we're comfortable with it. The demographics are positive for it.
Look, we still like the financials and we like the banks. Credit growth is growing quite robustly at this point in time and we still see benign bad debts. Still, the cost outs are still happening. So, we're still comfortable there and those four major banks have come back into the green zone again and we're quite comfortable, but I wouldn't be going massively overweight -- might be market weight the banks, the yield is obviously very attractive.
In some of the other financials, we don't mind the Vedas and Computershare. We've just increased our fair value on QBE and some of the negative or headwinds it's been facing now for many, many years have now turned and are starting to tailwind it. So look for that stock to probably outperform. In terms of others, again, US-dollar-facing – Brambles, James Hardie is expensive but I do like the stock, I just love the way they do business. They still value long-term value in the resources space. But you have to be patient.
In the retailers, it's a different play in that do you buy the beaten down Woolworths. Well look, if you hold it, you hold it. If you're going to buy it, it's a new position, you're going to have to be very patient -- that's going to take a little while to turn that around. So, you don't necessarily have to be there. Wesfarmers, we still like that if it pops down below $40 on a spike down, a yield of over 5 per cent, 5.8 per cent for 2016. These are the stocks we still like. So again, US-dollar-facing, the banks here still for the income. A couple of REITs we do like are Westfield Corporation and Goodman.
Grove: Peter thanks very much for your time today and don't forget your umbrella.
Warnes: Thank you very much Nick.