Written by Clancy Yeates, Brisbane Times. Clime Asset Management’s Chief Investment Officer, John Abernethy was referenced for the following article, published in Brisbane Times on 27 January 2015.
During the opening weeks of 2015, financial markets have been sending investors a clear message: brace for weak economic growth and record low interest rates over the year ahead.
In case there were any doubts, yields on “risk free” government bonds have hit record lows, a sign markets expect an even softer economy.
In an environment like this, which types of shares are likely to deliver the best returns?
ASX returns by sector in past 12 months
For many experts, it is hard to go past companies that can be relied on to pay sustainable dividends. And that tends to be blue-chip names in the more stable industries, rather than more cyclical or volatile businesses.
John Abernethy✓, director of Clime Investment Management, points to companies in the ASX100 with well-known brands, whose shares have an ex-dividend yield of about 4 per cent.
He says that sort of yield is attractive when interest rates are likely to fall even lower this year, according to some predictions.
“Given that we think term deposits in Australia are going below 3 per cent, we see the attractiveness of stable Australian industrial companies,” he says.
Abernethy nominates stocks including the big banks, Telstra, Woolworths, Wesfarmers, Coca-Cola Amatil, Stockland, IAG and Adelaide Brighton.
In particular, he says the banks “pick themselves”. NAB and ANZ, for instance, offer a grossed-up yield, which include franking credits, of more than 7.5 per cent.
Even though bank profits will probably expand more slowly over the next year or so, he says this is a good return in a low-growth environment.
Aside from decisions about individual companies, the weighting that investors have towards sectors can also have a big impact on returns.
Favouring healthcare or telcos over the past year would have paid off, for instance, in contrast to betting big on resources stocks.
This year, Perpetual’s head of investment market research Matthew Sherwood✓ says the lower oil price should benefit the consumer sector, because lower petrol prices will mean many shoppers have more money to spend.
Building materials companies should also benefit from a construction boom gathering steam, he says.
Some shares have already been inflated by investors bidding stocks with reliable yields – this is one reason why Telstra has hit record highs this year.
Sherwood points out that healthcare valuations are at historic highs because investors have been attracted by its reliable earnings, despite the softer economy.
At the other end of the spectrum is mining, where share prices have been battered by lower commodity prices. This has made these stocks look relatively cheap – but it’s worth remembering these tend to be much more cyclical businesses than the blue-chip industrials.
“There’s a lot of risk with resource sector earnings, but the valuations are getting down to levels where they may appear a better opportunity to something like healthcare,” Sherwood says.