Short-term cycles to continue into 2015

ST Wong, February 2015

Uncertainty caused by short-term trends will make 2015 a challenging market for equities investors, but there are opportunities for good returns provided managers stay disciplined.

Again, it is shaping up as a stock picker’s market. But the rapidly changing market landscape is a challenge for everyone. The trends are so short, even the macro trends are changing quickly.

Under current conditions, trying to pick out a single trend is less straightforward.

For example, it would be easy for us to dismiss the resources sector. And we have seen many investors avoiding resources. But, paradoxically, one of the best-performing large cap stocks in recent times has been BHP.

Staying true to your investment principles, and not being distracted by market noise, is paramount.

The market environment is currently a product of conflicting signals and divergent global markets. It’s quite clear we are at a fork in the road with Europe and Japan struggling on the one hand, and the USA showing strong upside on the other.

This has influenced some wild swings in currency and other markets, impacting the ASX.

Aside from adhering to our investment principles for picking stocks, we may consider the bigger, underlying structural changes playing out in the economy. Larger structural trends provide some direction in confusing times. For example, demographics is a structural influence which takes a long time to change.

Another example: the rise of emerging economies such as China into developed economies, which has taken place over a long period of time and is still playing out.

In the Australian equities market, investors should be looking for sectors which may benefit from the nation’s transition away from a resource economy. There are bound to be several sectors which emerge as economic drivers, on the stock market at least. For example: services and tourism show some potential.

We need to also factor in sectors and companies which may be affected by the federal government’s attempts to balance its budget and a slipping terms of trade.

The only way to navigate such uncertainty is to be stay grounded – we all want to enjoy picking the big winners, but in a market such as this avoiding the big mistakes will be more important to performance.