Broker Outlooks Pour In, But Private Investors Hold Tight

What’s the sharemarket outlook for 2018? It’s pretty good, say the stockbrokers … except you’re holding all the wrong stocks.

Perhaps as a private investor you’ve heard a line like this before … was it last year? Or maybe it’s been every year.

Certainly, as we enter the last trading month of the calendar years the divergence between what private investors hold on the stockmarket and what the big players in the market think they should hold emerges clearly. Indeed, it’s captured perfectly in the slew of “2018 outlooks” about to wash through the market.

But first things first — the outlooks this year are pretty upbeat ... even allowing for the in-built optimism that brokers must display to keep their jobs. The ASX is currently sitting on about 6000 and most brokers see another year of 8-10 per cent improvement in stock prices — and remember, we have an average dividend yield of more than 4 per cent.

Of course, brokers will always cover their backs with a range — UBS, a top global broker, suggests that by the end of 2018 the ASX will be at 6275: that figure is in the middle of a range that stretches from 5575 to 6735.

Meanwhile, Macquarie is more bullish: it plumbs for 6500, which would be a 9 per cent lift from where we are now. And who would not welcome anything comfortably north of 6250 bearing in mind that we must get to 6828 in order to be back where we were a decade ago in 2007. (That’s on a price basis, excluding dividends).

A common theme among these forecasts is that we are in something of a “sweet spot” with a modest improvement in profits, low interest rates, virtually no wage growth and a strengthening global economy.

But it’s when these reports get into what sectors — and specifically which stocks — investors should buy in 2018 that the yawning gap between their reality and the reality of the long distance private investor comes to light.

You see, we already know that private investors don’t run around chasing their tail tracking broker recommendations. This week we got evidence of this market reality when Credit Suisse pinpointed the most widely held stocks among SMSF funds — that is, the stocks where SMSFs have the highest percentage of the register.

This is the first time such an exercise has been carried out in Australia: Here’s the 10 stocks in order of concentration: Telstra, Woodside, Rio Tinto, NAB, BHP, Wesfarmers, Santos, Westpac, ANZ and CSL. Further down the list come QBE, CBA, Woolworths, Medibank and Transurban.

The outstanding feature of this list is the enduring faith private investors have in the big banks, miners and the monopoly/oligopoly players at the top of the ASX.

With the exception of Medibank Private, the list might have been compiled 10 years ago. And just look at the dominance of resource stocks — four stocks in the top 10! Not to mention the prominence of Telstra — a stock that has fallen hard this year yet remains top of the heap.

Hanging tight

What explains this trend-proof noise-resistant top 10 “mum and dad” list of stocks?

SMSF investors are slow to trade. They hang in tight with their portfolios. No doubt those miners were terrific up to — and for a time after — the GFC. Those banks have been good as long as anyone can remember and the yield-focused stocks such as Telstra at least still pay the dividend — in fact, Telstra’s yield at 9 per cent now is twice as high as the average from a blue chip stock. Hasan Tevfik of Credit Suisse says: “The list shows the SMSF investors are the ultimate long-term investors … and that’s very useful., they actually stabilise the market.”

Every now and again an exceptional company will break the mould — CSL, for example. Though few investors may understand the complexities of a multinational blood products group, the stock’s track record is deeply convincing. The presence of Medibank Private — though no CLS — is most likely explained by it being one of the few major privatisations of the past decade.

And so we can safely conclude that whatever the broker outlooks suggest this year, the majority of private investors — especially SMSFs — will take them with a pinch of salt. If some stocks in their portfolio are on the new lists then that will be welcome. If they don’t, it won’t be a signal to sell.

For what it’s worth, here’s a broad summary of what is forecast: Bank stocks are seen as “neutral” — they are heading towards an indifferent year. Resources have the potential to surprise on the upside — UBS is suggesting profit upgrades in the order of 30 per cent for the major miners: “This is due to an expectation of solid global growth supporting commodity prices, but also because of relatively undemanding valuations.” Indeed, BHP is on a P/E ratio of 13, which is less than half that of CSL.

The brokers are sceptical on “China plays”, especially the range of online players that have built a following with their links to China business. Needless to say the word “sell” remains as elusive as ever among the brokers but there are sectors frowned upon: Macquarie says “it’s too early to buy” discounted retail stocks and retail-sensitive property trusts.

But it is general purpose industrials where the brokers and willing to call strong buys. These include AGL, Aristocrat, Bingo (the waste recycler), Brambles Cochlear, Qantas and Seek. We will see many more recommendations in the next few weeks.

James Kirby

The Australian

25 November 2017

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