There’s a moment in every James Bond movie where 007 is in deep trouble with seemingly no likelihood of surviving against the bad guys. Yet, somehow he finds a way to save the day (and win the girl) before calmly dusting himself off and easing into a vodka martini (shaken, of course, unlike himself).
The current global situation has all the elements of a Bond saga.
It seems Hillary and ‘the Donald’ are about to provide US voters with a poor choice of President come November this year. The economic and foreign policy outcomes of either candidate will leave the rest of the world underwhelmed and very concerned.
If Britain decides to exit from the European Union, that event will also lead to some quite important implications for economic and political change.
Europe is struggling with a weak economic base and a major problem on how to deal with a massive human capital flight to safety from war torn Syria and beyond.
China’s growth engine has been sputtering and although it consumes more commodities than any other individual country, the slide in economic activity there has put a big dent in Australia’s economic wellbeing.
As RBA Governor Glenn Stevens again pointed out in his speech in New York recently, central banks everywhere have largely expended their monetary policy capacity to stimulate economic activity. As more central banks enter into negative interest rate policy territory, the vacuum of government driven fiscal policy means economic activity has no fuel. Former Federal Reserve Bank governor Ben Bernanke also recently repeated this viewpoint that governments need to do more to stimulate growth.
Governor Stevens also lucidly made the point that monetary policy had proved effective at staving off global financial disaster in 2009 but had had limited effect in repairing growth since.
More immediately, Australians have become possums in the headlights of a Federal election and are reluctant to do anything while the direction of political and economic policy is decided on 2 July.
Within that drama, Australia’s bank sector has become a pawn in the game with additional uncertainty likely to be placed over its regulation. The banks are already at a point in the cycle where
earnings are struggling, bad debts are beginning to lift along with yet further demands for higher capital requirements to satiate zealous regulators.
So, like Bond, investors seem to be staring down the barrel with hands tied and all hope abandoned.
“Now listen carefully, Bond”
Bond, of course, always has something up his sleeve thanks to Q.
But this is where my analogy with the eponymous Mr Bond parts ways. There is no magic carpet to whisk us away to earnings or political safety.
The yield story is under threat as various doyens of dividends take a more conservative approach to shareholder providence such as ANZ, probably Woolworths, but not Telstra.
The resources recovery has more to do with commodity prices stabilising at lower levels than with balance sheet repair and cutbacks to capital expenditure.
So as Q would have advised, finding the middle ground of stocks that will not blow up one’s portfolio is the key to survival in such a volatile world. Even though Bond pays little attention to Q’s sage advice, he inevitably relies on it to extract himself from impending disaster.
Hospital companies Ramsay Healthcare and Healthscope continue to roll out new theatres and beds that correspond nicely to steady earnings growth. Insurer Medibank Private has a new CEO turning up in July who will invigorate the group’s profitability. Blood products group CSL remains a firm favourite as it seldom disappoints on execution or earnings.
In telecommunications, other than the reliable dividends and $1.5 billion share buyback coming from Telstra, investors looking for growth should adhere to TPG Telecom or Vocus Communications as the latter ties in its merger with M2 Group.
In the broader industrial landscape, stocks such as Burson Group, AP Eagers and ARB Corporation make good money from the robust automotive industry.
In non-bank financials, Link Group is becoming the country’s pre-eminent superannuation administration business with the scale and technology to lower the cost per customer well below its mostly in-house competitors.
Sydney Airport remains a favourite with its direct exposure to burgeoning Asian and Chinese tourism.
Infrastructure companies like toll-road builder Transurban also hold strong appeal for their long-dated assets, good cash flow characteristics and high barriers to competition.
Internet-based businesses that capture real world applications such as REA Group and Seek also provide exceptional growth characteristics.
“M will see you now, James”
In the wash-up, Moneypenny is relieved to see Bond back in one piece but with some explaining to do to the boss about the collateral damage.
If the world order should face the likes of Donald Trump with his hand on the button (what will Kim Jong-un think of that?), or the stoic Brits decide to exit Europe (while keeping Scotland in the fold), then so be it. If Bill Shorten gains the Treasury bench and tinkers with fiscal policy a bit differently, then be prepared for some additional adjustments in the business world.
Portfolio management needn’t be quite so life-threatening and indeed it should be quite the opposite thriving on calm and calculated risks.