Australian Equities - 2017 Outlook
What lessons have you learned from 2016?
2016 has seen sweeping political upheaval as evidenced by the unexpected Brexit vote outcome and the US Presidential Election. This trend will likely continue into 2017, with the upcoming referendums and elections in Europe. We could potentially see more political risk resulting in uncertainty and volatility in financial markets.
The boom in commodity prices this year came as a surprise. This was primarily driven by supply issues as operators cut production through the downturn, as opposed to a recovery driven by strong demand. We continue to monitor the evolving opportunity through a building reflationary outlook resulting from President-elect Trump’s infrastructure aspirations and the optimism of returning growth in bond yields.
What are the key themes likely to shape the markets in which you invest in 2017?
With growing anti-establishment sentiment in a number of nations, we see political risk likely flowing to Europe. A number of parliamentary elections are taking place during the year and as we have learned, nothing is certain until the votes are counted. With an increased supply in commodities coming from already planned expansions and the natural market response to higher prices, we would expect commodity prices to moderate over the year.
We believe we have witnessed only the beginning of an unwinding of the yield trade and this is likely to continue into 2017 as optimism of a return to growth builds.
What are your highest conviction positions moving towards the new year?
In terms of the Henderson Australian Equity Fund, high conviction positions as we move towards 2017 include:
- Challenger – we like the company’s exposure to the structural growth in demand for annuities;
- QBE – we believe that QBE is a beneficiary of raising interest rates and a stronger US Dollar. Further, a tighter focus on costs is likely to turn the business around;
- ANZ – the new management team and their strategy of refocusing their Asian business has been a key driver behind our conviction. ANZ has also been more aggressive against peers on adjusting their cost base for a lower loan growth environment.
What should investors expect from your asset class and your portfolios moving forward?
The Australian equity market is heading into the end of 2016 on a positive note.
The rally in commodities has underpinned strong rallies in the miners and related sectors of the market, with resource stocks gaining strong earnings momentum. We see a looming correction for commodities in 2017 as output rises in response to higher prices.
In the era of record low bond yields, bond proxy stocks were a ‘safe haven’ for investors, driving the popularity of these assets. These assets are likely to underperform in 2017 as investors become more positive on growth and interest rates track higher.
Volatility is likely to remain elevated in a period of widespread political change and uncertainty. Additionally, there is a risk that bond markets sell-off too rapidly and this could cause a flow-on effect for equity market valuations.
Overall, despite increased volatility we expect equity markets to track higher as optimism around economic growth continues to build.
Lee Mickelburough joined Henderson Global Investors in 2015 as Head of Australian Equities. Lee is responsible for the management of Henderson’s Australian equities portfolios.