With the start of the new financial year comes optimism, hope and excitement about the potential for profit from the ASX. Well, that's the theory anyway.
The reality, of course, is an uncertain outlook caused in part by Brexit. Even though the world economy has generally performed well in recent months, there is now the potential for a slowdown in Europe which could impact the outlook for the rest of the world. And as the US election looms ever closer, I believe the next year could be a good time to buy shares in companies which offer sound defensive prospects.
Like Ramsay Health Care Limited (ASX: RHC). Sure, it has exposure to the European economy through its operating divisions in France and the UK, but the reality is that private hospitals are likely to be less positively correlated to the wider macro-economic outlook than is the case for most companies. This means that their profitability will, in my view, hold up much better and Ramsay may continue the run which has seen its shares rise by 17% in the last three months.
Such defensive appeal is likely to keep investor sentiment towards Ramsay buoyant. I'm also optimistic about its M&A programme as well as the investment it is making in broadening its facilities. For example, it has completed $126 million of new developments in the first half of the year which should aid its long term profitability and share price growth.
As mentioned, I think uncertainty will be high in the 2017 financial year and that's why I'm upbeat about gold's prospects. Newcrest Mining Limited (ASX: NCM) is therefore a stock worth buying in my view, since US interest rate rises are likely to be slower than expected and the gold price may gain support from a lack of competition from interest-producing assets. It will also be likely to continue to be seen as a 'go-to' asset for fearful investors across the globe.
I'm also upbeat about Newcrest's strategy. The company experienced a difficult period when the price of gold came under pressure between 2013 and 2016. However, its cost-cutting programme has created a leaner and potentially more profitable business and even though capital expenditure is still falling, Newcrest has the scope to raise production over the long run to boost profitability.
Although Insurance Australia Group Ltd (ASX: IAG) is not as defensive as Ramsay or Newcrest, I firmly believe that the majority of returns in equities over the course of the 2017 financial year will come from dividends. Call me pessimistic, but I think uncertainty will remain high and act as a brake on upward reratings, so IAG's yield of 5.9% could prove useful if, as I expect, the ASX fails to improve significantly upon the 2016 fiscal year fall of almost 5%.
Sure, IAG's commercial business is enduring its most challenging period in decades, but in the company's half-year results I was encouraged by IAG's improved organisational agility as well as its maintenance of market share in the consumer segment – despite limited movement on price. I'm not expecting a significant increase in earnings, but I am anticipating IAG's total return to beat the vast majority of its index peers in the 2017 financial year.
