Economics & Markets

What equity sectors should I invest in next year?

By Dermot Ryan
Sydney, Australia

Economics is known as the dismal science for a reason. Whenever there’s good news on the horizon an economist finds a reason to be pessimistic. It’s the nature of the economy to have natural stabilisers whereby a positive in one sector can mean a negative in another. It’s not that different for equity markets.

When the market is booming, there are always laggards. And when the market is struggling, as has been the case for the past four months, there are always opportunities.

From its lows in August 2016, the S&P/ASX200 rose by 22 per cent to its peak in mid-August this year. It has fallen by close to 10 per cent since then, but it remains about 11 per cent higher than back in August 2016.

So what should an equity investor be thinking about as we head into 2019?

The search for income

Investors need to look at sectors that have a stable or rising income stream. On that basis, we think that some of the traditional large cap sectors are challenged. The larger banks, real estate investment trusts (REITs), the supermarkets and telco sectors have been under pressure. The banks, for example, haven’t raised their dividends for three years and there’s pressure to lower them.

We think there are opportunities in low growth and fairly defensive companies with strong balance sheets and good cashflow. We like to see stability of income this late in the economic cycle.

What are we buying?

The chart below shows our views on how various sectors are positioned to perform. In tough times, cash is king. Opportunities lie in low growth companies with defendable cashflows, mid and small caps companies and resources.

Sector positioning
Source: AMP Capital

Others to watch

There has been a lot of regulatory change affecting the utilities sector during the past couple of years, which has pushed down the valuation of some utility stocks. With that regulatory cycle potentially coming to an end, there could be opportunities in areas such as rail and electricity.

Governments – both state and federal – are promising record levels of capital expenditure, so we are also looking at stocks that are well placed to take advantage of this big capital works spending. That’s an opportunity that will last for the next five years or more.

We’re a bit more cautious on REITS and infrastructure if interest rates start to rise. And any lift in interest rates would also flow into the household sector, which means we’re also more cautious on companies exposed to household spending.

In conclusion

Overall we think that income stocks represent the best value as their valuations are undemanding and many growth stocks are too optimistically priced in today’s market.

That’s where the opportunity lies.

To learn more about our view on where we are in the market cycle , watch our recent webinar.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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