Where I’m investing for 2015 – a Portfolio Managers view: With 2015 now underway, volume activities are starting to improve and investors have been hit with a slew of negative headlines from the European Central Bank (ECB) potentially adopting stimulus measures to ward off a triple Recession. And plummeting Crude Oil prices pulling a handbrake onto the economy (who would have thought cheaper oil/fuel would result in economic stagnation?).
Even the World Bank has chimed in, cutting its global growth forecasts for 2015. Their view is that the world economy will expand by 3.0% in 2015, down from their previous projection of 3.4%. This is due to weakness in Europe and China.
Supporting this view, the International Monetary Fund (IMF) also trimmed their forecasts for 2015 back in October last year, citing a 3.8% expected growth. So it’s all doom and gloom for the investor right?
I’m not concerned …
For those investors reading the headlines, you would be forgiven if you started to panic just a little. Some pretty smart people work for the IMF and the World Bank, so it would stand to measure that they couldn’t be too wrong. But remember that this is just a ‘projection’ based on current economic activity, and while Europe and China are struggling at the moment, there are some great opportunities on the horizon.
In last week’s article (Click Here for details), I highlighted two key points:
1) If investing in the Australian stock market, adopt Risk reduction strategies such as the Covered Call, and
2) The US stock market has better support for growth in 2015 and is expected to outperform Europe and Asia.
So here are a few of my investment thoughts for 2015, and where my focus will be for portfolio management.
For low(er) Risk investing, Buy a US stock market index.
The S&P500 increased 11.8% (not including dividends) in 2014. My expectations are for an 8% gain in 2015, based on continued slow growth in the economy. GDP growth rate will be between 3 to 4% with Unemployment remaining low and Inflation well within expectations. There are no yields in Bonds, so investors are shifting to US equities to find decent returns. This will help maintain steady long-term growth, and considering the US markets outperformed Aussie equity markets in 2014, I’m focussed on our Pacific cousins.
For domestic investment, adopt the Buy/Write (also known as Covered Call) strategy.
It is hard to formulate an expectation for stock market growth in 2015 for the ASX with commodity prices plummeting and our major trade partner (China) expected to slow again. For this reason, jump on the defensive. But instead of buying high yielding dividend stocks and potentially losing more in capital value than you earn in dividend yields, adopt a Covered Call approach which reduces Risk of stock ownership. The downside, it caps your gains. But hey, if you’re not expecting strong growth in the stock market anyway, and your mindset is about the regularity of premium return, then your approach is different. You will reduce risk, and potentially maintain a steady investment approach.
For specific Sector performance, look at Technology and Agricultures
Tech stocks have been booming, and will continue booming. They are the businesses that are cashed up and looking for new opportunities. Billions are being pumped into new start ups and that will accelerate the Tech sector. But Australia has limited Technology exposure, so again, look towards the US stock market. Besides, you have the world’s biggest Tech names listed in the US. You can adopt various strategies, or simply buy stock. I recommend discussing with your investment advisor, and if you don’t have someone who has access to US stocks/options/CFD’s, then give me a call as this is all I do!
The other sector to consider in 2015 is Agricultures. This sector was hit hard last year. Not as hard as Commodities in general, but certainly underperformed due to good weather conditions in the US, and strong yields from production. But as many of us have experienced here in Australia, good weather conditions do not last forever! After 2 years of good yields, even if that continues, the world continues to grow in population and there are more and more mouths to feed. The need for Ags and supporting companies (such as Monsanto and Potash who produce fertilizers) will only grow in the long-term. Look for long-term trend changes for entry points.
Safety in Utilities
Although Energy stocks have been hammered by declining Crude oil prices, Utilities have been the safe haven. It might be cheaper for consumers, but Energy companies are making less for producing the same amount. Eventually, production levels will decrease which will force up prices as the supply/demand ratio adjusts.
Utilities, however, will still need to provide energy at the same rate. As it will be cheaper for them to acquire Coal, Natural Gas, Crude Oil, Uranium, etc to provide energy, their productivity will improve. Although the growth will not match a Booming market environment, it will provide some stability for the long-term investor. The play for Australia is AGL and DUE, while in the US we have been holding DUK and EXC. There is a broader range of companies in the US to choose from, so I am usually a fan of choosing the index ETF, which my choice is XLU.
So there you have it.
An analysts view for how to approach your investment portfolio in 2015. This, of course, is not the full scope of where we are setting ourselves up, but it is the base starting point. In the weeks to come, I will dive further into our broader portfolio approach.
In the meantime, I’m watching the S&P500 index cautiously as it is hovering at the bottom of its medium-term range. This is a pivotal point where we either will see a recovery (for the short-term) or we will experience a break of the support base which could lead to a retracement to 3-month lows.
To learn more about these strategies Click Here