Transcription of Finance News Network interview with FNArena Editor Rudi Filapek-Vandyck and Fairmont Equities Managing Director Michael Gable
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me for an outlook on the hottest stocks and sectors in the year ahead from FNArena is its Editor, Rudi Filapek-Vandyck and from Fairmont Equities is Managing Director Michael Gable. Rudi, Michael, welcome to FNN.
Rudi Filapek-Vandyck: Thank you.
Michael Gable: Pleasure.
Lelde Smits: So Michael, which stocks and sectors supported your performance over the year that’s been?
Michael Gable: Our clients benefited from three different themes throughout 2014. Firstly, we chose to decrease our exposure to the big four banks and increase our exposure to the regional banks. We believed that the regional banks in particular Bendigo and Adelaide Bank Limited (ASX:BEN) would have more upside than the big four banks, that proved to be correct. The second aspect that helped our performance was the investment in healthcare stocks, so healthcare stocks continued to do well.
The specific ones that we were invested in included Sonic Healthcare Limited (ASX:SHL) and also ResMed Inc. (ASX:RMD). We were happy to pick that up around the five dollar mark, while it was still very unpopular with the rest of the market. And finally, investing in stocks with exposure to the US, not necessarily US dollar exposure. For example, we had a decent investment with Magellan Financial Group Limited (ASX:MFG), and Magellan Financial did fantastically well throughout the year. It exceeded our expectations.
Even lesser known names such as Brambles Limited (ASX:BXB), well everyone knows about Brambles of course, but it just doesn’t get the airplay that a lot of the other popular stocks get, but you’ll notice that Brambles has continued to quietly trend higher throughout the year so that has also aided our performance.
Lelde Smits: Certainly, thank you Michael. And Rudi, where did you see strength and weakness in your portfolio over the year?
Rudi Filapek-Vandyck:Well, for me that is a very straightforward story. I’ve taken a very particular view on investing in the Australian share market post GFC [Global Financial Crisis], so post 2008. Because, I do believe that the environment in the years after the GFC is different from before then. It’s in the negative sense, very simple; you don’t buy mining services stocks, you don’t buy mining stocks, and you don’t buy energy stocks. Now, energy stocks are a little bit contentious, I realise that, because I personally have expected that the ones that would turn into LNG [Liquefied Natural Gas] producers next year [2015] might have been worth consideration but we’ve seen that that too was not very accurate.
On the positive side; because essentially, if you take out all those sectors, by the way, it’s probably about three quarters of the market, or even four fifths, where you go like, ‘Well, they’re not ready for the portfolio, so what is then ready for an investment portfolio, in the post GFC years?’.
I believe that you look for dividend stocks; industrial companies that pay a dividend, and then can combine dividends with growth. So not just a Telstra Corporation Limited (ASX:TLS) that used to pay you 29 cents every year. You do buy Telstra that is now going to increase its dividends from 29 cents, to 30, to 32, to 34 and so forth.
The other types of stocks you buy are stocks that have an easier capability of growing their revenues and their profits, without necessarily being dependent on the interest rate cycle, or government support or consumer spending et cetera.
Lelde Smits: You’ve mentioned some categories there, can you mention some specific stocks, perhaps that you’ll being staying away from or stocks that you may be attracted to?
Rudi Filapek-Vandyck: Well, the negative side is an easy one: BHP Billiton Limited (ASX:BHP), Rio Tinto Limited (ASX:RIO), Woodside Petroleum Limited (ASX:WPL), mining services providers, you don’t have them in your portfolio as far as I’m concerned. You can use them for trading purposes but not in an investment portfolio in my view.
On the positive side, one of my favourite stocks has been, since 2009, Amcor Limited (ASX:AMC). How many times I’ve heard, quote “Rudi, I don’t know what you see in Amcor”, probably a million times. Well my main justification, I say, is look at the share price and the performance is there. I think Amcor symbolises the types of stocks that people should have in their investment portfolio; stocks that do not falter when the economic cycle falters and at the moment, are benefitting from growth overseas and from the weak Australian dollar.
Lelde Smits: Looking more broadly, Michael where do you see the S&P/ASX 200 index trading?
Michael Gable:I think for 2015 the market should head higher. One of the main reasons is 2014; we’re coming from a low base at the end of 2014 so we are at some fairly key support levels and I believe that over time, our market will head higher. However, I still believe that the key themes for 2014 will carry through to 2015 and that’s an increased focus on stock selection and there will be quite a bit of volatility throughout the year.
Lelde Smits: You mention volatility and now with the interest rate outlook having changed for the coming year; how has that impacted your trading strategy?
Michael Gable: The change in the outlook for interest rates is a big deal in my opinion. So, if we remember back towards the beginning of 2014, a lot of economists were expecting interest rates would have increased by now. That is clearly not the case; they’ve done an about face.
If anything, interest rates appear as though they will be cut throughout 2015 and will therefore be lower for longer. So, that will have implications on high yielding stocks in my opinion. So, if we think back to a couple of years ago, a few years ago, a lot of the banks and the high yielding stocks had a fantastic run because of the decreasing interest rates. I believe there will be renewed interest in those stocks again.
Lelde Smits: Rudi, where do you see rates and the dollar moving, and how do you expect this will impact your own trading strategy?
Rudi Filapek-Vandyck: Well, the dollar is probably going to be weaker. For the simple reason that the US dollar probably will strengthen next year [2015] on the back of a remarkable resurgent US economy.
Interest rates; I know the trend now is to expect RBA rate cuts but I do sense an RBA that is really, really reluctant to cut. My best opinion about the whole thing is that you select stocks that are not necessarily dependent on what happens with the RBA.
So the stocks I’m focusing on, and I have focused on, are the ones that are able to grow without the RBA having to cut or to raise their interest rates. Those stocks are the like of CSL Limited (ASX:CSL), Ramsay Health Care Limited (ASX:RHC), I mentioned Amcor.
Yes, those stocks are not cheap at the moment and they are unlikely to become cheap anytime soon. I think what investors can do is – there’s about a dozen of smaller companies that have joined the share market in 2014, or late 2013, and they have the capability of becoming the next CSL, Amcor, Ramsay Health Care and I’m definitely focusing on those stocks.
Lelde Smits: Certainly, and final question, Michael, what are your hottest stock picks for the year ahead?
Michael Gable:I think there’s two sides to the coin there; so it’s not just stocks we’d like to buy but also stocks to avoid. We touched on stocks that may benefit from a decrease in the interest rate, I mentioned the banks. I think consumer discretionary stocks could surprise us for 2015. Some stocks like JB Hi-Fi Limited (ASX:JBH) are coming off a very low base.
I’m also keen on those stocks with the US exposure, as Rudi mentioned, I think it’ll be very important to have those in your portfolio. With the increased volatility, I think it’s important that investors learn to understand the charts a bit more, perhaps be a bit more nimble throughout 2015, also look to employ hedging strategies such as covered call writing to help boost their returns.
In terms of stocks to avoid, I mean that is just as important as picking up the right stocks in your portfolio. So, resource and energy stocks; in some respects it’s ok to have some exposure to those, but as tempting as it is down at these levels; I don’t think conservative investors, in particular, should be increasing their holdings in those particular stocks. I mean mining services as Rudi mentioned, it is a disastrous area, I wouldn’t be touching that at all.
So, it is important not only to have the right stocks in your portfolio but understand which stocks will be under pressure and not get tempted by the seemingly cheap prices.
Lelde Smits: Great, well thank you Michael and Rudi for your insights today and all the best for your trading year ahead.
(20min delay)
