The past few years have been an interesting time to be following the ASX. First there was the GFC, then various fiscal stimulus measures, then a couple of years in which the euro/Greek debt crises were ever in the headlines.
In 2013 we saw what has essentially been a chase for dividend yield, sending the prices of some shares far higher than earnings growth would appear to warrant.
All of these factors have made for a bumpy ride and it has been possible to purchase shares with little regard for their fundamentals and still make money by buying when the latest headline causes a price dip.
However, much of these external influences on the market are now played out, with the debt crises in Europe and America largely subdued and Australia's fiscal stimulus measures finally taking effect in the form of credit/housing growth and a lower Aussie dollar. The mad rush for dividend yields in the face of tumbling interest rates has also stopped, with most investors' money now in shares instead of term deposits.
This is not to say there will be no further fluctuations caused by news — U.S. fiscal stimulus tapering and a slowdown of growth or commodity demand are just two stories I can think of that may affect share prices.
With all this in mind, I have composed a list of my opinions on what will happen in 2014. Overwhelmingly, I expect 2014 to be a year of a return to fundamentals in which there will be no rising tide to lift all boats. One will not simply be able to buy just any share exposed to one of the areas listed below and expect to do well out of it. But without further ado, my predictions for 2014:
1. Iron ore prices will remain relatively constant. Though I personally have sold half my iron portfolio in the face of potential oversupply beyond 2016, I expect iron prices and Chinese demand to remain largely unchanged this year. There are some great dividends in iron miners, particularly BC Iron (ASX: BCI) with a dividend yield of 8% (!) at today's prices. Rio Tinto (ASX: RIO) is another company for straightforward iron exposure; however it looks unlikely to bring many rewards for shareholders until 2015.
2. Dividends will remain important. With term deposits so low, I expect constant demand for companies with a strong dividend yield, particularly those in the ASX 100.
3. Gold prices will appreciate realistically and according to demand. Gold miners are relatively cheap, although most are increasing production or mining higher grade ores to maintain profit forecasts. This does raise the spectre of global oversupply and/or poorer mining years in the future.
If the gold price goes lower there could be an opportunity to snap up some bargains. Some companies to check out are Newcrest Mining (ASX: NCM) and Regis Resources (ASX: RRL). Two smaller companies are Silver Lake Resources (ASX: SLR) and Saracen Mineral Holdings (ASX: SAR). Saracen in particular has a solid two years ahead of it thanks to hedging ~80% of production at ~$1630 an ounce and production at all-in cash costs of $950/ounce from FY2015.
4. Consumer spending in general will rise. Consumer confidence was higher in 2013 compared to 2012, and I am expecting another modest rise throughout 2014. Higher levels of credit card debt, loans and consumer spending should occur in general. This should translate into better days for companies such as JB HiFi (ASX: JBH), Harvey Norman (ASX: HVN), David Jones (ASX: DJS) and Myer (ASX: MYR).
Banks should also see more business but I am not expecting consumer demand to rise so high that banks will not have to compete for customers. Competition and poaching tactics will remain quite high and I am expecting most banks with the exception of perhaps ANZ (ASX: ANZ) and Macquarie Group (ASX: MQG) to have limited profit growth owing to competition and the advent of smaller lenders. ANZ's Asian expansion, Macquarie's share buyback/ Sydney Airport (ASX: SYD) divestment and a recovery in National Australia Bank's (ASX: NAB) UK division should see reasonable earnings growth for these companies.
5. The Australian dollar should fall a little further from its current position. To quote RBA governor Glenn Stevens, "it will be surprising if a 9 in front is the right number". A falling Australian dollar will provide relief to exporters like miners and Sims Metal Management (ASX: SGM), whilst making things tougher for importers such as Nick Scali Furniture (ASX: NCK). It may also have the effect of making overseas online shopping less appealing, which could benefit domestic companies with fledgling online offerings such as Myer.
6. Just as Earth continues to orbit the sun, fiendish competition between Coles, owned by Wesfarmers (ASX: WES), and Woolworths (ASX: WOW) will continue. Both are buying up land and expanding their businesses not only to expand their customer base but also in many cases to prevent their opposite number from doing so. I expect both businesses to continue to perform solidly in 2014, with Woolworths targeting 10% growth. I am very interested to see what the next evolution in their competitive rivalry is, especially considering that the ACCC looks to be paving the way for an Aldi and Costco entry into the domestic market.
And there we have it, my predictions for 2014. I have made a note to revisit this article at a later date to see how they play out.
Happy investing and best wishes for the New Year!
