Three Investment Themes For The New Financial Year
As we approach the end of the financial year, the S&P/ASX All Ordinaries Accumulation Index up 7% slightly below the longer term average of 11%, it is timely to highlight the three key themes that we believe will drive the Australian equity market over the next 12 months.
Australian housing to stay strong
We expect the recent growth of the Australian housing market will continue through the 2015-16 financial year, fuelled by historically low interest rates and unemployment and the availability of debt.
While speculation of a housing bubble has abounded, we don’t agree. Although Sydney’s market is hot, a particular driver in Sydney has been the construction of apartments, which we believe will reach oversupply in the coming years.
The rest of Australia has been left behind to date, so we expect to see the Queensland and Victoria in particular pick up over the next 12 months. We expect this will be driven by net migration out of New South Wales and into neighbouring states. In fact, this might be happening already, last month the Australian Bureau of Statistics showed more people are moving into Melbourne and Brisbane than leaving.
Against this backdrop, first home ownership has dwindled to record lows of around 7%. Home ownership will become even more unattainable for the next generation, and it is likely Australia will follow the European path and become a nation of renters in the decades to come.
While we expect to the momentum in housing prices will continue, a fall away in the macroeconomic conditions, reduced migration or regulatory intervention could slow current house price growth and present issues over medium to longer term.
Merger and acquisition activity gains pace
The prevalence of cheap debt and the good health of company balance sheets will drive merger and acquisition deals in the coming financial year. This calendar year has been marked by major bids, such as iiNet, Amcom, Skilled Group and Toll Holdings.
Companies with valuable intellectual property, good cash flow generation and a strong strategic position in their industry will be attractive to potential suitors. We believe many of these targets exist in the small cap space as larger companies look to absorb smaller players due to their digestible nature.
US monetary tightening
As economic conditions continue to improve in the US, we think the Federal Reserve will commence a multi-year tightening cycle in the next financial year, albeit at a slow pace. We expect the economic recovery that followed the sharpest recession the US has experienced since the great depression will continue, albeit at more muted levels as the impact of the rising interest rates starts to bite. We expect this will lead to a further slow down in the current bull market for equities as historically an environment where interest rates are rising is a less favourable for equity investing than when interest rates are decreasing.
Chris Stott is Chief Investment Officer and Portfolio Manager at Wilson Asset Management. Wilson Asset Management is an independently owned leading boutique funds management business established in 1997 and based in Sydney.
Wilson Asset Management manages more than $1 billion of funds under management predominately in three ASX-listed investment companies: WAM Capital Limited (ASX: WAM), WAM Research Limited (ASX: WAX), WAM Active (ASX: WAA).
Chris is responsible for the research, management and construction of the company's portfolios and is a Director of WAM Capital, WAM Research and WAM Active. Chris joined Wilson Asset Management in 2006 and has more than 10 years' experience in the funds management industry. Previously, Chris was employed at Challenger Financial Services Group for four years in various research and administrative roles specialising in Australian equities. He holds a Bachelor of Business from the University of Technology, Sydney and a Graduate Diploma in Applied Finance and Investment.
Disclaimer: Gavin Wendt, who is a Financial Services Representative of Summit Equities Ltd ACN 097 771 634, and is a director of Mine Life Pty Ltd ACN 140 028 799, compiled this document. In preparing the general advice of this report, no account was taken of the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of the advice in this report, investors and prospective investors need to consider, with or without the assistance of a securities adviser, whether the advice is appropriate in light of the particular investment needs, objectives and financial circumstances of the investor or the prospective investor. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information.