If anything is uncertain in 2015 it is that uncertainty has increased and volatility has risen.
It’s a theme that Morgan Stanley analyst Chris Nicol and his team have picked up, releasing an insight report on “10 surprises that would matter” to Australian stock investors.
Nicols said: “Volatility is returning to global equity markets. Overlaid with a softening Australian macro outlook, the stage is set for high impact from the inevitable surprises markets will face.”
Here are the 10 surprises and Morgan Stanley’s rationale and possible impact on stocks.
- Industrial earnings growth finish FY15 negative – Bearish: EPSG for the ASX 200 has been muted, but Materials and Energy have driven downgrades. An FY15 industrial earnings recession’ is distinctly possible on our growth outlook, but would be a negative surprise to consensus.
- Oil rebounds above US$80/bbl – Bullish: Oil has become the ‘culprit’ for all things wrong in the market, and hence any rebound in oil prices to 2014’s perceived ‘floor’ in prices will challenge underweight Energy positioning and deflation fears.
- RBA cuts by more than 50bp – Bullish: While futures markets are pricing almost 50bp of easing, we think the RBA will try not to cut, but if it does, it will be by more than 50bp.
- Fiscal austerity abandoned – Bullish: Still constrained by an agenda of consolidation, a move to more stimulatory fiscal policy could be more positive for markets than any rate cut.
- Dividends cut – Bearish: Boards, not CEOs, set the dividends and a softening growth and earnings outlook will challenge boardroom appetite to keep payout ratios at upper bounds.
- BHP, Spinco outperforms parent in proposed spinoff – Depends: The recent collapse in BHP’s share price opens the value debate in energy, and challenges a view that the metals-heavy South32 is the better play of the demerger.
- Staples outperform REITs – Depends: REITs are the preferred defensives heading into 2015. Staples regaining the title would mean significant structural challenges are overcome.
- Healthcare underperforms the market – Depends: Given the Healthcare sector’s FX leverage with defensive benefits, market underperformance would challenge positioning.
- Japan funds Australia’s entire CAD – Depends: With monthly bond inflows of A$1.6bn/mth in 2014, the BoJ’s QQE2 step up and GPIF rebalancing, capital flows could surprise.
- Negative gearing becomes an election issue – Bearish: 2015 sees a Tax White Paper process that will put a number of issues on the table. Debate on the full tax deductibility of interest on investment property alone will have implications, but what if the Coalition takes the issue to an election to prove its reform credentials?
If you are wondering how Morgan Stanley did in 2014, here’s their recap of their performance.