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Uncertainty rises making portfolio picks tricky

by Colin Chapman

How long should you run a portfolio?  Or, to put the question another way, what is the optimum lifetime of your investments?

There is, of course, no simple answer. Many factors are involved – age, family and personal circumstances, health, personal wealth, location and so on.

The last few days has delivered some valuable information for Australians who are considering their investment strategy. It concerns the general environment in which we find ourselves laced, as it is, with uncertainty.

While analysts and financial commentators scour the recent spate of company results and draw conclusions – as we do – most qualify their recommendations by pointing to international and national uncertainties that could derail the progress of even the best run business.

Three comments read this week point up the fact that we face huge unpredictability.

The first relates to the American president, and the hope expressed that Donald Trump doesn’t really intend to carry through with some of the bizarre and destructive policies that he took to the election. Steven Munchin, the new US Treasury secretary, dismissed Trump’s election pledge to brand China as a currency manipulator, but within hours the president had told Reuters that China was “the grand master of currency manipulation”.

And so it goes on. No one knows what Trump will do. Hoping for the best is almost as pointless as preparing for the worst. But it would be a brave, even foolhardy, investor to assume that the record all-time highs of the Dow will continue.

Back in Australia Bob Carr, former foreign minister and NSW premier, made the sensible comment that we probably will have to wait eight years before finding out what really is going to happen in the United States, and whether or not it has retreated into a protective isolationism. Carr’s intellect, knowledge of the world and experience would have made him a better Opposition leader – and potential prime minister – than Bill Shorten, who falls down on every count except his capacity for populism and deception. Shorten set up a long, detailed inquiry into penalty rates – and gave a solemn election commitment to respect its findings and last week, when he didn’t like the outcome of the inquiry, reneged on his promise.

The third comment came from one of the country’s most respected former public servants, former Treasury secretary and now National Australia Bank chairman Ken Henry. He went back to Canberra last week and – as reported elsewhere – savaged the present political leadership. The comment that hit home with me was that Australia had become so paralysed by political inaction that it had gone from an optimistic nation, which pioneered some of the world’s best policy and nurtured world-class institutions, to a place that nobody looked to anymore “to see how it should be done”.

How true. What these comments tell us about timing our investments is that unless we are looking for quick gains over a short period –  perhaps even swing trading – then we should assume that the Canberra politics of which Dr Henry is so dismissive will continue for some years. We are likely to go through a period of a union-driven, left-wing, part-protectionist Labor government, and so we need investments that will hold up during that period.

If you accept that is the case, then you would steer clear of most mining stocks – except as short-term swing trades in a volatile market. The biggest risk is that Trump-led protectionism, probably aided and abetted by Shorten, will damage Australia’s trade with China and Asia as a whole. A slow-down in world trade growth will also affect oil and gas.

Australian agricultural and medical exports will continue under the adverse circumstances described above. A2 Milk, produced in New Zealand (a better-run country than Australia with no structural deficit) will continue to flourish. Bellamy’s fate will be decided when shareholders vote on Tuesday, and we hope that they reject Jan Cameron’s motion, assuming it is put to the meeting. Bellamy’s was our worst performing stock.  It has a long, hard road back from the mistakes of the past, and we hope ASIC will soon publish a report on its investigations. CSL and ProMedicus will benefit from the inevitable fall in the $A over time.

The latest Australian growth numbers will be published in the coming week, and will show that the recessionary fears that followed the last poor numbers will not be realised. But if a Labor government is elected, under present policies growth will slip back again, ending the downward trend in unemployment and sapping consumer confidence. In those circumstances, we would expect consumer confidence to fall and property prices to start drifting, except in the most sought after districts of Sydney.

Qantas was the best performing share in our portfolio last week, rising 6.32% on better than expected half yearly results, showing the nation’s flagship carrier continues to make gains over Virgin Australia, whose recent management decisions are suspect. But QF CEO Alan Joyce makes no bones about the short-term headwinds, and the need to remain competitive, and so much depends on whether tourist arrivals hold up. That is true also of Sydney Airport, though it has no competition and would be wise to pass up the opportunity to build the expensive second airport at Badgery’s Creek, unless the Turnbull government comes up with better terms.

Half of our stocks were losers last week in a spell when the S&P ASX 200 was also down 1.10%. Tesla dropped back on news that Elon Musk wants to raise more capital, but will be the ultimate beneficiary when the world, including Australia, gets around to long-term battery storage for households; along with Microsoft, Tesla remains a decent long-term bet. For different reasons, the same is true of APA.

Evolution Mining lost 5% in the week as gold weakened; this might be a good time to buy in as a speculative stock, because the moment Trump does something daft gold will rise again, and that day will come.

 

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