The following article was originally published in December to members of Motley Fool Pro. The figures have not been updated. Click here to learn more about this real-money portfolio service that The Motley Fool is backing with $1,000,000 of its own money.
We’re wrapping up a big year at Motley Fool Pro. We launched in March, hosted our inaugural AGM, and issued 14 trade alerts. Pro members have enjoyed first crack at new special premium reports, including our China 2015 coverage, and we’ve met with companies in Sydney, Melbourne, Brisbane, Auckland, Wellington, and San Francisco.
But 2015 will be an even bigger year for Pro, with January an omen for the year ahead.
The Big Charts
2015 is shaping up to be a big year not just for Pro, but the Australian economy and market. Here are a few charts that shine a light about the road ahead.
Ah, and a quick word. These charts aren’t all sunshine and rainbows — we see the Australian economy slowing through 2015. Still, it’s important to underscore that we’re happy being nearly fully invested in Pro, the companies we own have strong recurring revenues that will allow them to thrive across cycles, and our heavy focus on companies with big international arms means our exposure to an Australian downturn is surprisingly limited. That fall in the Australian dollar you’ve been hearing about? That’s a tailwind for the globally-centric Pro portfolio.
In short, the portfolio we’ve constructed is built to deliver us gains whether the local economy slows down or not. We feel great about the shares we own today and, if you’re not already caught up, be sure to catch our recent 8 Pro Shares You Can Buy Today [Members-only link].
#1: Australian Unemployment
Employed people spend. They take trips, go to cafes, and have the confidence to take on big mortgages. The unemployed stay home and rue the day their accountant convinced them a negatively geared investment property was a good idea.
You’ve probably heard by now that Australian unemployment is perched near a 12-year high at 6.3%. That might sound high to you until you remember that 1) there hasn’t been a recession during that time and 2) unemployment reached 11% during early 1990’s recession.
Another frame of reference is to look at the averages and ranges. Today’s 6.3% is a good deal better than the long-run average of 7%. Range-wise, the gap between current unemployment and its peak is 3X the size of the gap between today and sweet lows reached in 2008.
There’s an important distinction between our current slowdown and the early 1990’s recession, though, and it has nothing to do with mining: It’s about debt.
#2: Consumer Debt Levels
Australian households have taken on a great deal more debt than in years’ past — household debt to disposable income has roughly 3X’d since the last recession.
The reasons aren’t crazy — rates have fallen and the asset side of consumers’ balance sheets has boomed thanks to a great economic run — but it does leave less wiggle room in household budgets, making the average family more susceptible to job losses or pay cuts. It has also made consumer spending more sensitive to changes in interest rates, which is a double-edged sword. The good news is that rate cuts help quickly and cut deeply. The bad news is that, with so much debt on consumers’ shoulders, the RBA will have a hard time raising interest rates to cool growth when boom times come back.
The moral of the story: Rising unemployment could hit consumer spending faster and harder than in years’ past, plus Australian interest rates are likely to stay lower for longer than most pundits are forecasting.
#3: BREE Committed Major Resource Projects
You’ve heard by now that commodity prices have been punched in the gut. What you might not have heard was that corporate investments in new projects were already on the downslope.
The Bureau of Resources and Energy Economics (BREE) was recently folded into the Department of Industry. BREE did release its latest semi-annual report on the state of committed major resource projects in Australia first, though. The results, which barely take into consideration commodities’ tumble in the back half of this year, weren’t pretty.
The number of committed major resource projects has fallen by 49% over the past two years. The dollar value of projects at feasibility stage has likely been halved. Given that capital expenditures are already dipping in Australia and these are multi-year projects, that means Australian capex (think business spending) could fall further and for longer than most forecasters expect.
Our move, of course, has been to stay patient when it comes to dipping our toes in the resources waters. Resource producers tend to be capital intensive price takers that are happy to dilute shareholders in the name of growth — so, uh, the opposite of what we typically prefer. As ever, though, there’s a time and place for every investment, so we’re keeping our eyes peeled.
#4: Small Caps Get Set to Outperform
Multiple studies have found that over the long-run, smaller companies have outperformed their larger peers.
The reasons are simple enough. Smaller companies have a longer runway for growth than their more mature peers. They are also overlooked by most analysts and institutions. That neglect means that a small-cap can suddenly surge in value when its rapid growth leads it to become too big to ignore.
Late-to-the-party institutional investors suddenly start to pile on, and the share price soars from the combination of underlying growth and multiple expansion.
And yet for the past two years the S&P/ASX SMALL ORDINARIES (ASX:XSO) has actually underperformed the rest of the market.
That divergence won’t last forever. The nimbler small caps should close the cap with their lumbering older siblings over time, and reclaim their place at the front of the race. Once you add in all the headwinds the big banks and miners are facing it becomes hard to avoid.
Mr. Market might not be paying attention, but we sure are!
#5: Australian GDP
Let’s go out on a high note! Yes, 2015 might make for a bumpy ride and, no, the mining boom won’t go on forever. Over the long run, though, Australia’s have-a-go spirit, population growth, and vast natural resources have made for the following growth in GDP:
We’ll bet you can barely spot the recessions in that chart. And it’s not because you have poor eyesight — it’s because, over the long run, recessions are nothing more than speedbumps. So stay optimistic, Fool, and whenever times get tough, just whip this chart back out and take a breather.