Market Outlook for January (By Market Matters)

Shawn Hickman from Market Matters has provided the first Market Outlook for 2015. If you have a question, please ask in the comments at the bottom of the page.

Shawn Hickman

Managing Director at MarketMatters.com.au

Shawn is a professional trader and investment adviser in equities and derivatives. Shawn operates the online investment report "Market Matters" where he shares with subscribers his investment strategies and share trades as they are placed.


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27 January 2015

Analysis is updated Monthly


We are in an extremely simple market at present and both investors and traders should not fight the current trend that may last well into 2016.

Simply, interest rates are extremely low and historically, money has NEVER been so cheap, but commodity prices continue to decline and may easily have further to fall.
 
1. 10-year bond Interest rates are at all-time lows in Australia and official rates may start to fall again in 2015 – the $A falling under 79c may result in the RBA sitting on their hands for a few months, they unfortunately have a reputation of being slow to react compared to overseas counterparts.
2. Commodity prices continue to plunge with Crude Oil down over 50% in 8 months, Copper falling 21% in 3 months and Iron Ore down 53% in 13 months. With production increasing and demand falling as China normalizes, further falls are very easy to imagine.
 
I reiterate again that I have no interest in buying resource stocks as an investment for the foreseeable future; I believe the stocks are currently being valued around elevated commodity prices and this is a dangerous game, especially if prices decline further.
 
Alternatively, with Australia 10-year bond rates at 2.5%, our high yielding quality stocks are arguably cheap.
 
• Last week we purchased Telstra (TLS) looking to benefit from 7.2% fully franked return over 13 months, extremely attractive compared to unfranked term deposits.
 
Amazingly, Banks now represent almost 40% of all company profits on the Australian market and hence an enormous influence on where the ASX200 is heading. With banks also offering solid fully franked returns, it’s hard at present to see a significant decline in local equities.
 
• Commonwealth Bank (CBA) is paying approximately 6.96% fully franked dividend over the next 13 months. Clearly very attractive to local investors.
 
This current year should be fascinating, as the US is likely to commence raising interest rates (Fed Fund rate only 0.25% at present), but the yield of US 10-year bonds has declined to 1.8% from 3.1% in early 2014, implying professionals believe rates will stay “lower for longer”.
 

So what of my call for a correction in equities?

I have not changed my mind on both degree of pullback and target area, but it appears likely that the free money trade reignited by the European Central Bank (ECB) last week is going to fuel a rally in equities higher short term:
 
1. European Indices – Look to have another 6-8% upside after the ECB decision last week.
2. US Indices – I’m 50-50 on all except the NASDAQ which remains bullish.
3. ASX200 – is positive while it holds over 5420.
 

Bullish

- The ASX200 while over 5420
- European Indices
- WPL while over $32
- CBA, WBC, NAB, RMD, SEK and Telstra.
 

Neutral

- DOW, S&P500, Hang Seng & Nikkei,
- Newcrest (NCM), Regis (RRL), ANZ and MQG.
 

Bearish

- Interest Rates
- Copper, Crude Oil & Iron Ore
- BHP (longer term)
- Fortescue (FMG) and WOW
 

MY CONCLUSIONS

• Telstra and Banks will continue perform well in coming months.
• Watch bond markets carefully for any move away from “cheap money”.
• I have no interest in the commodity space.
• Equities are likely to rally further prior to a meaningful retracement and I currently would rather hold Telstra / CBA for February dividends than cash during this period.


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