Christine St Anne: The markets never ceases to surprise us as volatility continues. Today, I'm joined by Your Money Weekly's Ian Huntley to give us his forecast over the next six months. Ian, welcome.
Ian Huntley: Hi.
St Anne: Ian, over the last three years, you've held the view that the market would zig-zag ranging between 4,000 to 5,000, that view has pretty much been accurate. What makes you think that we're going to see the start of a market bull run?
Huntley: Volatility doesn't particularly trouble me, I think it's a crazy word. It means the market goes up and down, right? Hey, what's new? It always does. But, what I've looked for is, over the last three years following the GFC, is a workout period. I have compared it initially to structure that strategy with this workout period following the 1987 crash, when we actually had three years of a zig-zag market, which is exactly what I've looked for over the last three years, and I have said it crudely between 4,000, 5,000, with a bit slippage to 3,800 and last year, I thought there was a 20% chance of it going up and breaking through 5,000, 5,500. At 20%, the major chance was it didn't, and it didn’t.
But I've also look for, around this year - later this year for the beginnings of a new - a teens decade bull market. If you look at the history of the market, decade bull markets are there every year - every decade over the last 100 years. Why should this one be different? But the launching pad for a bull market can be a very messy corrective phase. The bear market’s got to suck the majority of the people in, before it launches the next upside, and interestingly that first leg up can be very, very powerful indeed. If you looked at the run up from the March 2009 crisis low, there was a pretty powerful market there, and there was a lot of money to be made in that particular period. Sure, that it came after a period of a major horrendous mess, particularly in property trusts and over-geared companies, but that's the way it is.
St Anne: Ian, do you expect interest rates to fall and if that's the case, what sort of strategies do you think retirees should look at?
Huntley: It's very interesting that quite a few people have - equity inclined people have around about 30% of money in the sidelines and bank deposit, some people obviously have more. In fact some financial planners have been describing bank deposits as a new asset class. Well, I'm an equity investor and I simply regard money on deposit just as a short-term thing, while I wait to find a better opportunity in the market. I think this market has got lots of opportunities. It's cheap. It's actually a much safer market to buy-in than the top of 2007 by definition.
So, there is a lots of things that can go up over next three to five years. Now over the next few months, our market is going to continue to be roiled by the looks of it, by the European stuff, but it's going to be a low interest rate world. That could mean a bit of strength in the Aussie dollar, that's hard to pick. There is downside in Australian interest rates, but not massive from here. We've got a very powerful resource investment boom, something the United States simply doesn't have that underpins our employment picture and that underpins our household's ability to repay their mortgages and that underpins our banks stability. So, I think the banks offer good yields. I prefer to have my money in the bank rather than on deposit, but I don't mind particularly if the shares go up and down. I bank the dividends.
Now, if I'm buying them relatively cheaply, it's not fussing me if they go down 10%, 15%, 20%, they'll get back up. But I've sort of lived through a lot of volatility. As long as I'm happy that the stock is not going to go out the back door or something like that or be permanently damaged, I'm quite happy to hold.
I'm used to my stocks fluctuating often, usually on a long-term trend going up. As long as I’ve got the available liquidity, let's buy more. I think that's a wonderful strategy, but I tend to be a long-term investor and I absolutely love the dividend income. It's not hard to generate 6% fully franked in this current market in quality stocks.
Some of them are extremely high quality. A company with a good business and a good balance sheet - at Morningstar, we broadly describe a quality company as having a moat, either a wide moat or a narrow moat, which is a good definition of a competitive advantage, which will underpin that company's earning power at a reasonable level for many years to come.
My own personal best definition of a company with a moat is, with a great thank you to Warren Buffett; will this company still be around in 10 years? It's a great question. If you can understand that that company will still be there in 10 years and growing and doing well, then you sit down and look at a few more figures. If it's got a good dividend yield and that dividend yield is growing, then I just fall in love. The damn bank deposits I prefer that, but I'm me, and that's the way I look at it.
St Anne: Ian, what's your view on commodity prices?
Huntley: Currently, there is the biggest resource investment boom in our history, that's massive. Now that's feeding through into the rest of the economy and that's underpinning employment. Now, the commodity prices are now well and truly off. Iron ore and copper and metallurgical coking coal to my mind are still excellent prices.
They’ve come off their peaks, but metallurgical coking coal, there was a massive flood in Queensland a year ago, and they are still excellent long-term prices. I would think that - personally I think that iron ore was stay up at a very reasonable price for the next few years, and I think copper will surprise the bears and be at very good prices, probably in the next decade. But that doesn't mean that they are at record prices. Copper is now about $3.30 a pound, and not so long ago it was over $4. But you got to remember five or six years ago people thought $1.20 a pound for copper was extraordinary.
Now, these are excellent prices that copper and iron ore and metallurgical coking and coal are very much driven by Chinese demand, and I'm not a China bear.
St Anne: There has been a lot of talk about the growth in China. Do you think that the slowdown will be substantial?
Huntley: I think that's a load of garbage. Look, you've got to understand the newspaper business, I grew up in it. Fear sells a lot better than good news. There is nothing like a good murder, right? Now, if you sit down and say, hey in Australia there is 23 million people are still alive today. Guess what, you won't sell a newspaper, but if you say, so and so was murdered last night, they’ll want to read it and saying (urrrrrrr…).
Now look, China is going to still be growing over the next 15 to 20 years. There is 1.3 billion, 1.4 billion people still earning - their earnings have really grown since Deng unleashed the economy right back there in the early 1980s, after 100 years of absolute strife in China, most of all under Mao, his predecessor. They wrecked the country with a cultural revolution. The leaders of China don't want that again, and they sit down and work very hard and they study very carefully, they listen to criticism, and they're really trying to continue to grow that country. Do not underestimate them.
Now, some of the suppositions that you see in the headlines to my mind are absolute garbage. The impact of Europe on Chinese exports, at most I can figure out would drop, that's very much the worse case, would drop Chinese GDP by 2%. This is something that in recent years has been running at 10% or 11%. Now I'm quite happy with a figure of somewhere between 7% and 8% this year. Now, if you want to be bearish you can allow for failures and drop 1.5% off it. But I always focus on iron ore demand and that's continuing. The major driver in China will continue to be, for quite a long time, investment in infrastructure.
Look, this is a country that’s the same size as the U.S. or Australia, it’s a continent. They've got to make up for 100 years of doing nothing. They've got put in rail lines, power lines, it's massive, and that drives jobs. Their consumer is growing at 15% per annum. They’re selling more motorcars in China than they're doing in the States. This business about no consumer growth, and all the rest of it in China, I don’t know how much more do you want, 13% to 15% per annum? It just defies me.
China is turning around at the moment. I would expect that 2013 would be quite a buoyant year in China. Look, real estate is starting to pick. They are starting to drop interest rates. Our Reserve Bank has described this particular downturn in China as a policy-driven downturn. Interesting phraseology. The downturn in Europe and in the United States is not policy-driven. It's driven by a 70-year build up in debt, which is now being written-off, or repaid.
St Anne: Ian, what about gold? Do you think that would continue to be a safe asset?
Huntley: You reckon gold is a safe asset? Good luck. I'm far more interested in quality income earning assets, especially when they're paying me good income. You've to remember gold does not pay you a dividend. It's an asset and where you win is if it goes up.
Now, I have lived in African countries and I do understand, in a situation of turmoil, it's rather lovely to have gold, funnily enough U.S. dollars. I once stuffed a fishing rod full of U.S. dollars and left a country, that was the only way I can get my money out. I spent six months getting the U.S. dollars, but that's a long time ago. The amount of U.S. dollars I put in the fishing rod was quite important to be at the time.
Now, gold is that type of asset that runs across borders. Now, yes, I remain positive in gold because there is so much drive. There is so much need to resort to the printing press, and in many ways gold at the present time is relating as an alternative currency.
So, all I can say, I think that Europe is going to be currency turmoil and money printing. I don't think gold is going down. Now in the United States, there is another two or three years of debt run down by households, the economy is going to be sluggish, and the Fed is going to be quite correctly, to my mind, trying to keep the place on an even-keel.
So I remain positive on gold. I think gold shares are selling at too much of a discount to the earnings they've got to be making over the next few years, but it's not a place where I put a great deal of assets.
St Anne: Ian, thanks so much for your time today.