What a volatile week! We are finally getting some Christmas cheer after a soggy start to the so called Santa Rally, with the market crashing to a 10-month low on Tuesday. The market is trying to make a fool of us all, but the real fools are those who are paralysed by the volatility.
Despite recent predictions of doom and gloom, things have actually been looking brighter in the last few weeks – not that you could tell by looking at equity markets.
What this is telling me is that stocks are the place to be for 2015, particularly dividend growers (companies that are well placed to increase their attractive dividends) and select small caps. I'll explain why in a moment.
Oil is down big time and hard commodities have come off substantially. Sure, that may drag on sentiment in the resources space, but there's little talk about how stimulatory these factors are for global economies – especially for Australia's best trading buddy China.
This isn't to say China is facing few risks. If anything, economists have been predicting a slow down for a while now but that's when oil, iron ore and copper were still flying relatively high. One thing I've learnt from my years in the market is that commodity demand is very elastic. This means that when prices fall, demand rises although it sometimes takes a while to see a demand-side response.
What's also noteworthy is the disconnect between oil & gas stocks and the commodity. The sector has been attracting bargain hunters even on days when the crude oil price has fallen. Today is a good example with the likes of Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG) jumping close to 2% in morning trade even as oil continues on its downtrend with the West Texas benchmark falling from around $US58 a barrel to under $US56 a barrel.
Santos Ltd (ASX: STO) is another noteworthy mover on the market with a close to 3% surge as fears that it has to undertake a dilutive capital raising eased on news that it secured an additional $1 billion bank loan facility with a three-year maturity from Australia & New Zealand Banking Group (ASX: ANZ).
This is an early but encouraging sign that investor confidence is making a comeback – a trend that is likely to carry through to the New Year, if not beyond.
Any improvement in investor sentiment will see small caps dominate the leader board. To be sure, I am not saying there will be wholesale outperformance among the juniors, but there are a number that are well placed to beat the ASX All Ordinaries over the next 12 months.
Looking for exposure to a potential sharp rise in inbound tourism from the falling Australian dollar? Ardent Leisure group (ASX: AAD) is one to watch because of its Gold Coast theme parks and attractions. Further, these facilities also stand to benefit from any jump in local tourist numbers as Australians could feel dissuaded from holidaying overseas with the weak Aussie. This will be a great outcome as margins at Ardent's theme park division have been under some pressure lately. What's more Ardent's bottom line will be padded by the rise in the US dollar because of its US-based entertainment centres, Main Event.
Other small caps that I expect great things from in 2015 are those brave enough to leverage the low cost of debt to make earnings accretive acquisitions. Think of it as the corporate Australia "carry trade". Automotive services and products company AMA Group Ltd (ASX: AMA) falls into this category with management today announcing its third acquisition in 14 months. AMA has agreed to pay $1.44 million for Queensland-based accident repairer Shipstone Accident Repair Specialists.
But it's not only oil that looks to finish out 2014 on a low point (it's hovering very close to its post-GFC low). Bond yields are down too and the US Federal Reserve's pledge to be patient on lifting interest rates helped the Dow Jones Industrial Average deliver its biggest one day gain since 2011 of 2.4% last night.
The outlook for Australian government bond yields is even bleaker with a number of economists following Motley Fool's Bruce Jackson in calling for domestic rate cuts. The chart below show the downward changes in our sovereign bond yield curve, and that's very supportive of equities.
The difference in yields between government bonds and our share market is at its widest in at least a year and that's going to keep good dividend-paying stocks in investors' good books for the foreseeable future. But not all dividend payers will be hotly sort after in 2015. The ones to target are those that can keep growing their distributions even if economic conditions remain lacklustre.
Your portfolio needs you to act, so stop sitting on your hands or you'd risk being a real fool – and that's no way to be celebrating Christmas.
