Members’ report: The risks and rewards for stocks in 2014

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David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. HnH any spectacular performers in the market next year will not arise as a result of the economy or economic conditions.
    The stars will be companies whose circumstances have changed and who the punters expect to offer some value.
    if it was that easy to predict all economists would be wealthy. WW.

    • Meh, that’s doctrinal value investing clap trap.

      I’m not a stock picker. I watch markets. As all stock pickers also should. Asset allocation makes up a very large portion of returns.

      Anyone sticking to Aussie stocks (without offshore earnings) next year is in the wrong market in my view. If you want to disagree with that then go for it.

      But if you think this analysis was easy and isn’t the fruits of thousands of hours pouring over data, two decades of market observation and a long empirical education in market economics, then you’re pretty spoiled.

  2. Thank you for the article.

    I think because of the tax implications (imputation), local firms with offshore earning are better.

  3. GunnamattaMEMBER

    I am looking through a JP Morgan late November Australian stocks sheet…….

    lead page

    Aussie equities in 2014
    New year’s resolution: be less bearish
    Australian Strategy

    • More of the same, but choppier. The fundamental drivers of equity rerating – low rates and low volatility – should broadly remain intact in 2014 but enter more difficult territory. Tapering announces the (modest) beginning of the (protracted) end of the US’s low-rate regime; and volatility is likely to rise simply because markets have come so far. Overall, though, we think current valuations are defensible and our ASX200 targets reflect this: June 5500 (was 4800), December 5700.

    • Market jumped our 2013 tripwires. We thought that a global bond correction and a weak local economy would make life tougher for stocks in 2H13; the mid-year correction was all we got. Arguably the experiment was just postponed as sentiment turned more hopeful on Aussie growth and the Fed stopped the bond correction. Indeed this is why we think 2014 will see only modest gains as these headwinds return. But we clearly underestimated the staying power of stocks in a regime of soggy growth, low short rates and a lack of event risk.

    • Inflation, not anticipation. While we concede that the PE bulls got it right, we still take issue with the EPS optimists who see the rally as a pay-forward on an earnings upgrade cycle. We see neither macro nor micro support for this on a broad market basis and retain a cautious view on local growth, outside some spots such as housing construction.

    • Portfolio tilts: against AUD, Banks. Within an equity portfolio, we continue to favour non-AUD earnings as we see medium-term downside risk to the currency over Australia’s growth transition. Our Banks underweight is three parts valuation to one part macro – loan quality risks are lower than in past phases of rising unemployment, but the sector is priced for little or no risk. We also think it could be more vulnerable to market corrections as yield-focused buyers are sensitive to volatility.

  4. H&H – good analysis.

    I completely agree the smartest play is to bank on a decline in the AUD.

    Sure, you can do this by picking Aussie stocks with offshore earnings or by investing internationally (unhedged) either directly in individual stocks or – more easily – through a managed fund.

    My expectation is that when I see a ‘7’ at the front of our AUD/USD exchange rate, it’s probably time to unwind the bet.

    I’d also add that there’s greater chance of a sharp fall in the AUD than a rise of a similar amount.