Rather than write another year ahead door-stopper, I wanted to be short and to the point on our expectations for 2015. I wanted to state the facts as they are, to dispel a few misconceptions, and to make it clear and plain what we are looking out for in 2015.
To be clear, I want as many of you to read this piece as possible.
2014 worked out reasonably well for us on balance. We got some right, and we got some wrong. Fortunately however, through both prudent portfolio construction and sticking with quality we were able to mitigate risks and to recover where necessary and ultimately flourish. As a reminder our two key managed portfolio’s delivered returns well in excess of both the market and the vast majority of Australian fund managers in 2014 – the Prime Australian Equity GROWTH portfolio delivered a 13.4% total return, and the PRIME Australian Equity INCOME portfolio rose 8.4%, both well in advance of the 5.6% achieved by the ASX200 Accumulation index.
In 2015 however, we are thinking the following:
- AUSTRALIAN SHARES – PRIME expect the ASX200 to close the year at 5900+. Throwing in a portfolio dividend of perhaps 4-5%, this suggests a total equity return of 15%+. We hope to emulate the successful stock-picking of 2014, and to achieve returns in the vicinity of 20% for equity portfolios. In other words, we fully expect a better year in 2015 for equities.
- AUSTRALIAN DOLLAR & INTEREST RATES – The Australian Dollar will trade in the 76c-84c range. The RBA will likely cut interest rates by 0.5% early in 2015.
- AUSTRALIAN ECONOMY – sure, the Australian economy isn’t great, but nor is it is as bad as the press and market commentary suggests. Simply put, the time for economic and stock-market pessimism was 12+ months ago. The mining and government fiscal drags are negative, but well known.What is under-appreciated is the impact of the AUD at 80c on economic throughput, employment and local profit margins. What the Australian economy lacks now is confidence and self-belief. We think further cuts to the RBA Cash Rate in early 2015 will release these animal spirits, and the economy will continue to improve through the year.Rate cuts, a lower currency and collapsing gasoline prices are all enormously stimulatory.
- OIL – the next OPEC meeting is not until early June. It is hard to expect much respite in oil prices ahead of then, which means we can afford to be patient in our potential buying of oil-related shares. Yes, Australian oil stocks are increasingly pricing in a pessimistic scenario, but that doesn’t mean they need to be bought.We are happy with Woodside (WPL) in the medium-term due to its quality asset base and clean balance sheet, but SANTOS (STO) and Origin (ORG) are both highly geared and still not super exciting. Oil Search (OSH) would be a name to have on the radar, but we have time. I repeat, let’s be patient.
- INTERNATIONAL SHARES – there is a dramatic push within our industry for foreign equity exposure at present. The falling Australian dollar has rewarded offshore exposure recently, notably in the U.S. in 2014. Whilst we concur that there is strong merit in portfolio diversification by way of international equity exposure, do understand that Australian shares are currently at a 10-year low to their U.S. counterparts.Secondly, please also recognise that ‘international’ does not simply mean the U.S. In fact, if push came to shove I would suggest Asian stock-markets have the best potential for outperformance in 2015. We are working on this as we speak.
- … HAVE SOME VISION – lastly, be alive to the reality that not all good ideas are perfectly neat and come wrapped in shiny paper and a bow. By this I mean, if we want to outperform the market we can’t only choose to have our portfolio made up of the same 10 blue-chip names that we have come to know and trust.To outperform, we need to step outside the box.We have all had partners, colleagues or friends tell us to ‘have some vision’, and I would echo that. There will be some stocks that we recommend this year that might cause you to cringe, but just know that sometimes there is great value in the unloved, unwashed and unwanted.
So in all, we want you to be fully invested in Australian equity markets. We want you to understand that the pessimism prevalent in the mainstream press is increasingly unwarranted. We want you to be prepared to question consensus, and be prepared to hold our hand when we suggest rotation of your portfolio, perhaps in part, to stocks that fall outside the Top 20 names.
In return, we will ensure that we repeatedly focus on protecting your downside, that we take risk only where the reward is compelling, and that your portfolio’s remain of a high quality, appropriately diverse, but most of all, forward-looking and proactive in nature.
As a business I believe PRIME is in as healthy shape as I have seen it in the 2 years I have been at the firm. We have made some incredibly high quality appointments in the advisory group, and there will be more to come.
I sincerely encourage all communication with me and the wider investment committee (Mark Johnson, Greg Chivers & Cameron Morcher) in the year ahead, and I really look forward to seeing more of you in person in 2015 – if you want to sit down and have a coffee and a chat, simply ask.
Sincerely, Jon Bayes