Depending on who you’re listening to, crowds can be either wise, or completely mad. In reality, both are probably true at various points in time. But whether you’re a crowd-follower or a natural contrarian, knowing what the crowd is thinking is invaluable information. Each year, we ask Livewire readers for their take on a series of predictions about the year ahead in our annual survey. With nearly 7000 responses (making it the largest survey of its type in Australia), the responses offer some fascinating insights into the thinking of the average Australian investor. The topics covered are broad, from interest rates, to equities, house prices, and even geopolitics. So read on below to find out what Livewire readers are predicting for the year ahead.
“Since other investors may be smart, well-informed, and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it wont be sufficient. You must be more right than others… which by definition means your thinking has to be different.” – Howard Marks in 'The Most Important Thing Illuminated'.
Question 1: Interest rates
Interest rate expectations couldn’t be more different now than they were this time last year. For 2019, 73% of readers expected the RBA to hold. For 2020 an even larger number are now expecting a cut, and not without good reason. Inflation is low, growth is low, and there doesn’t appear to be anything likely to change that in the foreseeable future. One change that would likely have not been considered at the time of the survey would have been the impact of the Australian bushfires this summer, which Shane Oliver recently predicted could produce a 0.4% hit to GDP this quarter and trigger the RBA to cut rates to 0.25%.
However, it’s worth considering the opposite view. In our recent ‘Bulls, bears, and consensus trades’ video, several of the expert guests identified low rates and low inflation as a crowded trade that could unravel at some stage.
Question 2: Aussie equities
After such a strong return in 2019, momentum is clearly on the side of Australian equities in 2020. Despite warnings from several fund managers that ‘last year’s returns can’t be repeated again’, the data suggests otherwise.
In 2019, the S&P/ASX 300 Accumulation Index returned 23.8%. There have been 18 occasions since 1900 that the Aussie market has returned 20-30%. The following year the market produced positive returns on 17 of those occasions, meaning there were positive returns in 94.4% of these years. On average since 1900, 81% of years are positive.
Additionally, the returns following a 20-30% year are higher than average at 18.5%, compared to an overall average since 1900 of 13.1%.
As always, past returns are not a reliable indicator of future returns, but based on this data point, it could be another good year for stocks in 2020.
Question 3: Finding income among big caps
If you’d told an Australian investor in 2016 that BHP, Rio, and Fortescue would be considered income stocks in less than five years, you’d very likely have been laughed at. But here we are. BHP paid out $2.74 in grossed up dividends in CY19, excluding the special dividend paid in January, resulting in a gross yield of 6.9% based on today’s prices. If you add in the special dividend, that number jumps to an outrageous 11.9%. While there’s no guarantee of a repeat performance this year, things have clearly shifted in favour of the miners on this front as their capex bills have come down and their free cash flow has reached the status of ‘money printing machine’.
Question 4: The ASX’s biggest company
Another year, another big return for CSL. After nearly a decade of outstanding returns, readers are again tipping CSL for a big year in 2020 – the stock was one of the most-tipped stocks in our survey once again. You’ll have to wait for the full list next week for more details though.
CSL has been up more than 10x since October 2011, with a 50.7% return in 2019 (including dividends). But with a forward PE ratio of ~42 times, and a $132 billion market cap, it’s a much harder proposition this year. However, it only needs to outperform CBA for this prediction to come true, which may happen even in the event of subdued returns for CSL, should CBA fall far enough. CBA’s market cap currently sits at $144 billion.
Question 5: Quantitative easing
Given that there have been several economists and fund managers predicting Australian Quantitative Easing (QE) on Livewire in recent months, it came as somewhat of a surprise to me to see the (slim) majority of readers coming down on the side of no QE. A look at the ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve (try saying that 10 times really fast) shows that expectations are for at least one more cut, which would take us down to the 0.5% mark where many have speculated that QE would begin. All this seems to depend on the future for both the Australian and global economies. While business conditions appear to be improving globally, the recent bushfires introduce a major element on uncertainty.
Question 6: House prices
After a flurry of discussion in the first half of the year, the discussion on house prices ground to a halt in the second half. Both the bulls and the bears have gone quiet. Perhaps the bears are licking their wounds, and the bulls are being patient. Or maybe both sides just aren’t sure if we’ve seen the last of the declines? Either way, I couldn’t write this article without giving credit to Marcus Padley, who called a bottom for the housing market back in May. Whether we see further gains, or a return of declines, one thing I’m confident in predicting is that the topic will come back to prominence at some point in 2020.
Question 7: The US Presidency
And last but not least, we come to Trump. What can be said about Trump that hasn’t been said already? One thing I find fascinating, is that despite him being a deeply unpopular President (arguably the most hated in modern history), everyone expects him to be re-elected. Sadly, this appears to have more to do with the Democrat’s inability to field a competitive candidate, rather than actual support for his regime.
Keep an eye on your 2020 predictions
Well, that’s it for this year’s predictions. You can see the outcome of last year's predictions here. Hit the “Follow” button below to be notified when I post an update on this year's predictions. You can expect one update mid-year, and a final tally in the first days of 2021.
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Note on data sources
The table in Question 2 contains data sourced from multiple locations. The 2019 data used the ASX 300 Accumulation Index and was collected manually and calculated by the author. Earlier data was sourced from Market Index, who used a combination of the All Ordinaries Accumulation Index (from 1980) and regional exchanges (1900-1979). Please refer to the Market Index link above (page 2) for a copy of their disclaimer regarding data sources and integrity.