This year hasn't been particularly kind to investors with the share market barely able to hold above breakeven as our offshore counterparts are ending 2014 with a bang.
The underperformance can largely be blamed on waning currency and commodity markets. But 2015 should herald better times.
The reason why we are lagging is not so much a function of a weak Australian dollar but a volatile exchange rate. Investors can stomach downbeat macro-economic conditions brought on by our worsening terms of trade much more than uncertainty of where the Aussie dollar will end up.
This means international fund managers will avoid Australian equities until there is greater stability on the currency front. They might just get their wish in the New Year.
Regardless of whether you think the Aussie dollar is over-or undervalued, most of the carnage is probably priced into our dollar.
This should give Australian equities a chance to play catch up in 2015, particularly given that our market looks better value than their peers in the United States.
I suspect we will also enjoy relatively smoother sailing for commodities also given the big de-rating suffered by the asset class.
Sure, there are predictions that iron ore will fall under $US60 a tonne and oil will crumble to $US40 a barrel. That would be certainly be another big kick in the gut for Australian resource stocks. But there's one thing I've noticed about commodity forecast over the years. More often than not, analysts get it wrong at the extremes.
They tend to overestimate when commodity prices are running up and they tend to be over pessimistic when prices are in a free fall.
This is one reason I am overweight mining and energy stocks for 2015. One stock that I like is Rio Tinto (ASX: RIO), not only for the potential for iron ore prices to stabilise around current levels for the next 12-months, but also because of its corporate appeal. I think Glencore will make a second play for Rio Tinto in 2015.
For energy stocks, I would target those with strong cash flow generation and balance sheets. Oil Search (ASX: OSH) comes to mind thanks to the cash it stands to make from its PNG LNG, while Woodside Petroleum (ASX: WPL) is one I would target for its balance sheet strength – that's assuming management spends its cash wisely.
Again, the trick is to ensure you get enough diversification within the sector. How many resources stocks you should own depends on your personal circumstances. Hopefully, this article gives you a starting point to have a conversation with your financial planner.
See you on the other side of the year!
