Will 2015 be another year for the stock-pickers to thrive?

 Firstly I'd like to briefly comment on the market which has implications for my reasoning later on.

The Australian share market closed higher toward the end of 2014, as the final few weeks of trade saw the ASX200 surge. This comes amid weaker unemployment numbers and consumer sentiment (according to the Westpac consumer sentiment report). However, a weaker dollar should help our exporters or Australian companies who have earnings dominated in US dollars.

More recently, the plunge in iron ore and oil prices continue to drag our markets down, with big movers such as BHP/RIO and to a lesser extent, the likes of Santos continuing to plummet. Overseas, the DJIA has risen to levels not seen, ever. Breaching the 18,000 mark, optimism in the US equity market is at levels not seen for years. With interest rates still at historically low rates, and Yellen, intent on keeping  rates as low as possible for as long as possible this may continue to prop up markets.

As we ride into 2015, i remain cautious about our prospects in the near-term. When the RBA return in Feb, interest rates may be cut, given the weak unemployment data among other things such as inflation.



The 2014 reporting season saw EPS growth rise about 5-7% (with low organic growth) and high payout ratios, i beg to ask where growth will come from. Given the low interest rate environment and the lust for yield, investors have stormed into the share market propping up prices. While the long-term P/E ratio is not at a huge discrepancy to current levels, if this continues, valuations may rise to levels unjustifiable by EPS growth going into FY2015. As interest rates may be cut  (nonetheless remain low) growth may come from M&A activity. This will help companies like Macquarie Group (not to mention the high levels of IPOS). This in conjunciton with lower oil prices, will no doubt benefit consumers and boost global growth. However, Some major investors are returning money to shareholders, such as Seth Klarman, who argues the fairytale of "free money" will not continue indefinitely.

Given the circumstances, i am in no position to comment on what to do but what i will do is comment on some facts. Research shows that value companies (trading at low P/B) tend to outperform, so sticking to deep value investments may be one method. Another theme, and to the the contrary, are companies with strong moats, which can continue to deliver EPS growth during "tough" times. Companies such as REA,  (which have been upgraded to a buy by Deutsche Bank)  Carsales and Flight Centre ( which i believe may offer some good value at current prices) may reflect this theme. However, if such companies have the slightest disappointment, the market, due to their high multiples, will punish such stocks. This is where Value stocks tend to outperform, when times are tough and bear markets take over.

 As oil prices continue their "demise" (lol) and stocks closely linked follow suit, opportunites can be found, E.g, Santos? Emphasis is placed on balance sheet health and companies with competitive edges such as low-cost producers, which act as cushions during tougher times.