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Winners and losers in the Year of the Monkey

Anthony Fensom  |  12 Dec 2016Text size  Decrease  Increase  |  

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The year started with dire warnings about a global crash, but ended with US stock prices at record highs, despite the shocks of "Brexit" and the US presidential poll.

For Australian investors, picking the right sectors in the mischievous Year of the Monkey has proven challenging, with the Year of the Rooster set to deliver its own surprises.

Equities

Investors were rightly concerned when the S&P/ASX 200 bottomed out at 4,706 in February, in what was the worst start to a calendar year in the index's history. However, a bounce back led by China's unexpectedly vigorous fiscal stimulus saw the index post a 52-week return of 7.5 per cent as of 8 December.

US President-elect Donald Trump's proposed infrastructure investment and environmental deregulation spurred the resource sector higher in the aftermath of his shock election victory.

Meanwhile, a policy-induced supply shortage in China drove coal and iron ore prices higher, confounding analyst forecasts.

Materials returned a standout 43.3 per cent over the last 52 weeks as of 8 December, with the utilities and consumer discretionary sectors also showing double-digit returns on the year.

On the other hand, with bond yields rising since mid-September, real estate investment trusts (AREITs) have faced a difficult end to 2016. After a near continuous rise from 2014 to July 2016, an 18.7 per cent plummet in the sector between August and November saw AREITs post negative growth for the calendar year.

Telecommunication companies have also suffered badly in the last 12 months, with the sector returning negative 9.25 per cent over the last 52 weeks as of 8 December. This was led by a slump in Vocus Communications (ASX: VOC) and TPG Telecom (ASX: TPM), which have been among the worst performing stocks in the ASX 200.

For 2017, Morningstar's head of equities research, Peter Warnes, expects the S&P/ASX 200 to trade in a range between 5,200 and 5,900, compared to its current level of around 5,500.

Property

Australian property investors have enjoyed a mixed year, with rising bond yields and falling bond prices hitting the AREITs. Average values have fallen by as much as 20 per cent since June, with the recent decline in GDP and weak inflation threatening cash flows.

"It's time for caution on AREITs--either look for less yield-sensitive REITs, or at other more cyclical sectors of the markets," AMP Capital's Shane Oliver told The Australian Financial Review.

For residential property investors, the recent fall in the price of Melbourne apartments may signal a slowing of the property boom. House prices in the Victorian capital dipped by 1.3 per cent and apartment prices dropped 3.2 per cent in November, according to the Corelogic Hedonic Home Value Index.

Across Australia's capital cities, dwelling prices were up by 9.3 per cent as at the end of November, but there were stark differences across the states. While Sydney and Melbourne were showing gains of 13.1 and 11.3 per cent, respectively, Brisbane was only up by 3.9 per cent and Perth was down by 3.4 per cent.

Amid warnings of an oversupply for apartments in Brisbane and Melbourne and record household debt levels, commentators suggest the boom may run out of momentum in 2017, particularly if the Reserve Bank of Australia starts increasing rates.

Morningstar's Warnes has urged investors to keep plenty of cash in hand in 2017, amid expected further volatility from the new Trump presidency and potential new economic and political challenges in the Eurozone.

The Year of the Rooster may yet be more stable than the Monkey, but after the shocks of 2016 investors cannot afford to be complacent.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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