Morningstar Adviser Research Centre: year in review 2019

<p><strong>Glenn Freeman</strong>: We come to the end of another year. And as always, there's been a number of highs and lows for investors. We've taken this opportunity to speak to a number of our analysts about what's really stood out for them, what&rsquo;s moved the dial in 2019 and looking forward into 2020 across financial services, energy markets, infrastructure, and some of the other sectors that really move our markets here in Australia.</p> <p><strong>Nathan Zaia</strong>: So, I think 2019 is a year that most of the banks will want to forget, I mean, the sector was struggling with low credit growth and pressure on margins. But then just the magnitude of the customer remediation costs really surprised us and later in the year, the regulator scrutiny and actions they've taken against the banks could lead to massive penalties. So, I think it's been quite a tough period for the banks.</p> <p><strong>Gareth James</strong>: So, I think the interesting trend we saw in 2019 was the impact of interest rate cuts on company valuations and particularly on technology stocks where we've seen strong trends continue throughout the year. We've seen companies like WiseTech Global and Xero increase their share prices and reach pretty surprising valuations.</p> <p><strong>Brian Han</strong>: So, in the telecom sector, I think the most &ndash; the thing that stood out the most is how determined the ACCC was in trying to prevent this merger between TPG Telecom and Vodafone Australia. It is saying essentially that if we prevent this merger, TPG will resurrect its ambition to enter the Australian mobile network space, which of course TPG itself has publicly said that we are not going to because privately, I think it knows that it doesn't have the financial resources. It is actually hampering Vodafone in the Australia mobile space and TPG in the Australian broadband space, which is ironic when you consider what the mandate of the ACCC is.</p> <p><strong>Mathew Hodge</strong>: It was all about the tailings dam failure in Brazil, wiped out 6% or 7% of iron ore. Iron ore price went from around 60 bucks to I think it peaked over 120 and still around kind of 90 bucks now. That was really the story of 2019. You had a supply shock. You also had China on the demand side. Steel production in the first half of 2019 in China was 10%, massive demand for iron ore. That was unexpected. 2020, I think, we're going to see that unwind.</p> <p><strong>Peter Bull</strong>: We came into the year with some large positions in some areas that were a bit nervous with the trade war talk coming on. Semiconductors was one; luxury items, consumer discretionary is another. And it turned out, 2019, they were some of our best positions. I think the other big story in 2019 for us was markets are up 20%, 30% again, and for us, I think that's probably typical in such a low interest rate environment. So, it's kind of like the whole world has gone with bond math where you've got low interest rates and a 1% move means like 100% move in your capital investment. So, if the new normal is sort of low returns or has been the low returns to be expected going forward for risky assets, because the price is so high, that might be true in a long-term sense, but meanwhile, year-to-year, I mean, we should expect 20% one way or the other. So, nobody should be too surprised by that.</p> <p><strong>Lex Hall</strong>: I think the biggest story of the year was probably the thumping election win by the coalition because the pundits said that they were going to lose and it was dubbed the miracle election because they ended up winning, they ended up defeating labor. It's the first time since 2001 that a federal government in Australia has won a third consecutive term and it of course removed all that uncertainty about franking credits, which is so important to our investors and it removed uncertainty about changes to negative gearing and capital gains, which obviously, investors were worried about. Also, it increased industrial relations regulation and a boost of the stock market, in particular banking stocks, which rose between 6% to 8%.</p> <p><strong>Emma Rapaport</strong>: Yeah, I think, as one of the younger members of the team this year, with interest rates being as low as they are, it really struck me how a lot of my friends were talking about cash rates, were talking about the rates that they were getting from their banks, and really thinking about how else they could use their money to get better returns, you know, should they start investing and what should they start investing in? For me, it really spurred a conversation around getting started in the market. So, for me, that was a really interesting development from the year and something that was really interesting to write about.</p> <p><strong>Mark Taylor</strong>: I think the big thing in the oil and gas sector was the cost reductions, unit operating costs, particularly for companies like Santos, went surprisingly low. Company is doing a fantastic job of stripping costs out, doing things more efficiently, driving cash flows higher. And the other thing of course, in 2019, which is leading into 2020 as well, is the front-end engineering and design that was being undertaken on a number of major project expansions. Final investment decisions for these projects will be taken in 2020. So, that's the thing to look for in 2020, something that could be a catalyst for share price appreciation of a number of stocks.</p> <p><strong>Adam Fleck</strong>: One of the surprising things about 2019 has been the rapid fall in interest rates and of course, that's had a very positive impact on a lot of our Australian coverage, perhaps most notably in the highly leveraged transportation infrastructure sector. I cover Auckland Airport and Sydney Airport. And both companies have seen their shares, their security prices rally sharply throughout the year. So, in our opinion, the shares are simply not pricing in the risk that we see going forward for continued passenger slowdowns, particularly if there's an economic slowdown, even in places like China, which is an important source of traffic for these reports and of course, very long term, if interest rates start to rise again. So, as investors and analysts, we will be recommending waiting on the sidelines for the two airport securities in our market until there's a margin of safety that's more appropriate.</p> <p><strong>Alexander Prineas</strong>: So, we saw declining interest rates generally driving property stocks upwards, but I think there were some important distinctions to draw. So, differently, office and industrial exposed stocks such as Dexus performed well, whereas retail stocks like any bar Unibail-Rodamco-Westfield, Scentre Group or Vicinity Centres, the share prices were weaker there. So, I think what that shows is that you can't just rely on interest rates pushing the performance for property stocks.</p> <p><strong>Grant Slade</strong>: Big in 2019 was the contraction that we saw in the Aussie housing starts. So, after peaking in mid-2018, we saw Aussie resi construction contract around 15% in fiscal '19. That said, investors did anticipate that contraction activity fairly well. It would go sort of back to late 2018. Broadly speaking across Aussie housing-exposed names, that impact was well priced in.</p> <p><strong>Chanaka Gunasekera</strong>: Defensive, momentum and growth stocks have been outperforming &ndash; a Australia's been outperforming pure value strategies. And that's a reflection of very poor performance from global equity managers like Platinum, domestic equity value managers like Perpetual, for example. And the key question is, will that reverse in 2020. The other thing is buy now pay later. zip and Afterpay have done really well, fiscal 2019 as well. Now, there's a question mark, will that continue in fiscal 2020 given that the RBA is doing a major review of the payment system and will be looking at by now pay later. They will be looking at things like surcharging, which could impact particularly Afterpay. So, that's a real question mark moving forward in fiscal 2020.</p>