Ten major themes for 2014

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
24 March 2014, 1:02 PM
Sectors Covered:
Resources, Metals

The Morgans Research team has flagged the major equity themes to watch in 2014, and it's not too late to adjust portfolios to capitalise.

These ten themes revolve around our expectation that the Australian dollar (AUD) will to continue to fall toward our 2014 target of 80 US cents, and that superior growth opportunities will be found offshore:

1. Global currency re-alignment - a bumpy ride to 80c for the AUD

The basic premise of our call for further weakening in the AUD is forecast strength in the US economy relative to Australia. Such strength in the US will have ramifications across developed and developing markets globally. The compound impact has potential to spark a flood of USD currently invested offshore back to the US denominated assets.

We believe this dynamic will drive rapid currency re-balancing similar to that triggered in India, Turkey and Africa in late 2013. We caution that this will likely lead to equity market volatility as investors assess the potential impacts to global growth.

2. Go global for growth

Our Chief Economist Michael Knox forecasts overall growth in the US up to 3.3% in 2015 - driven by improved consumer spending, a better market for housing and stronger export growth. This is well above the 10-year average of 2.4%.

Europe continues to slowly emerge from recession, although growth across the region is expected to be uneven. After growing by 7.6% in 2013, we expect China will expand again by 7.3% in 2014.

Exposure to international shares can be achieved by investing in Australian shares with significant overseas earnings. Exchange Traded Funds (ETF's) offer the lowest cost and most transparent way to get direct exposure to offshore market indices although there is no element of active stock selection so expect index-like returns.

3. Australian interest rates - lower for longer

The Australian economy is in the early stages of a recovery from a growth recession. Australia is growing at 2.7 to 3.0% as we move through 2014. Unfortunately Australia needs to be growing a little bit faster (3.2%) to stop unemployment from drifting up. This dynamic is generating Australia's so-called 'jobless recovery'.

The higher level of inflation (2.7% at end of 2013) makes it difficult, if not impossible, for the RBA to cut rates any time this year. Unless this data changes, we think rates will stay where they are for the balance of 2014.

It is implausible that any Central Bank would increase interest rates with unemployment going up. When we get to a situation of above-trend growth and falling unemployment, it might be another matter.

4. Play a domestic cyclical recovery...but carefully

The Australian economy's strong relationship with the US, particularly around capital markets, supports the idea that stronger US growth will generate stronger Australian growth. The problem is that our economy is likely to lag the trajectory in the US by 2-3 years.

Beneath that, we think that a prolonged period of low interest rates and soft wages growth will help to contain costs for Australian corporates. This is actually a positive for consumer discretionary expenditure and residential development.

Reporting season certainly showed us that 2014 will be a year where the market will reward select cyclical companies demonstrating real earnings growth.

5. Capital management to command a premium

Several large cap blue chip companies (notably the banks and the big miners) have entered a period where capital expenditure commitments have significantly reduced and where surplus cashflows have reduced gearing to comfortable levels.

The balance sheets of several companies are now approaching levels where investors will be pressuring these companies to return this cash to shareholders in some form rather than holding onto surplus cashflows. For these companies, the low interest rate environment and strong equity market valuations are also conducive to increased merger and acquisition activity.

The capacity to consider capital management in the form of increasing payout ratios and/or special dividends is generally very well supported by the market and we expect the examples above to trade strongly through 2014. 

6. Business transformations - unloved and/or under the radar

We've seen several business make fundamental changes to strategy in response to the competitive landscape, structural change or legacy balance sheet issues. Initiatives can range from workplace reform to asset sales, recapitalisations, de-mergers and management clean-outs.

We have identified several companies that are currently (relatively) unloved by the market, but each has exposure to valuable underlying assets and each is undertaking change to realise that value. Such 'turnaround' stories will often attract strong support from deep value and tactical investors. 

7. Domestic tourism recovery

Domestic tourism is an obvious beneficiary of a lower AUD as the relative cost of domestic versus offshore travel improves for Australians. This in itself is a solid driver of the reinvigoration of the Australian tourism industry which has struggled against a backdrop of increasing regional competition and lack of investment.

What is even more compelling is the potential growth in total inbound travel as the Asian region becomes wealthier and more open to international travel. 

Chinese visitation to Australia is growing incredibly strongly. Australia as a destination currently captures around 1% of the Chinese travel market share with obvious scope for this to grow enormously.

8. Disruptive technologies

Technological advancements have dramatically altered the landscape of several industries in the last 20 years. The purported death of 'old media' is perhaps the most visible example.

The first movers into disruptive technologies often enjoy the highest profiles as investors price this growth at a premium. The difference between today's 'online boom' with the 'tech boom' of the late 90's is that significant growth in real cashflows are already being enjoyed.

We have identified our preferred disruptive technology plays which we believe can continue to grow market share in their respective industries.

9. An ageing population

The proportion of the Australian population aged over 65 years has grown from 8% in 1970-71 to 13% in 2010. It is predicted that over the next 40 years that will rise to around 25% while the proportion of working-age people is expected to fall by 7% to 60%.

This will increase pressure on the healthcare system and see a greater demand for services utilised by an older demographic like retirement accommodation.

The theme also has strong implications for the wealth management industry. Australia's superannuation pool is the fourth largest in the world and is expected to grow to $7.6 trillion by 2033. The transition of Australia's ageing population from the accumulation to the retirement phase is expected to see around $66 billion of super dollars looking for more conservative, income-based asset classes.

10. Energy - watch the LNG ramp-up

Australia is fast approaching first LNG exports from the East Coast, with activities also ramping up in Western Australia including the Gorgon and Wheatstone LNG projects. The focus now is on final costs to project completion, ultimate pricing of LNG, and the supply of gas into the plants. 

Supply to both the domestic east coast market and the LNG export market appears tight in the 2015-2017 timeframe, and gas prices have been rising for those with available gas to sign into contracts. 

Our view is that gas prices will continue to rise as gas demand outstrips current 2P reserves, and those with actual (and potential) gas reserves should benefit.

More information

It's not too late to adjust your portfolio. The Morgans Research team have identified eleven key picks as a way to play these themes. Clients can contact their adviser to discuss further. 

If you are interested in becoming a client please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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