While it's impossible to predict the future, successful investing is as much about avoiding the poorly performing sectors and shares as it is about snaffling the rocketing winners over any given period.
Serious investors appreciate that the huge winners will normally pass them by due to their speculative nature, while realistic expectations should allow you to generate wealth-building returns with little more than smart stock selections and time in the market.
It's worth considering then which shares may offer strong returns in 2016, before then trying to identify those that should be avoided on the basis of tough outlooks or other risks.
Shares to consider
- Shares exposed to the benefits of a falling Australian dollar and increased activity in the services sectors like tourism may perform well in the year ahead. Today, Australia's largest listed hotel operator Mantra Group Ltd (ASX: MTR) hit a record high above $5 per share, while the newly named Event Hospitality and Entertainment Ltd (ASX: EVT) is another hotel and leisure sector operator touching 52-week highs on a more attractive valuation around $15.90.
- The best diversified financials may post a bright year if US equity markets are supported by the strong growth forecast for the North American economy, while UK economic growth at 2.9% is predicted to be the second fastest in the advanced world behind the US. Three of my strongly preferred fund managers for exposure to these themes are Macquarie Group Ltd (ASX: MQG), Magellan Financial Group Ltd (ASX: MFG) and UK-based Henderson Group plc (ASX: HGG).
- It also looks hard to go past some of the fastest-growing internet-focused technology businesses on the ASX due to their tail winds, scalability and growing demand for their services. On the more speculative end are internet connectivity businesses like Superloop Ltd (ASX: SLC) or Megaport Ltd (ASX: MPC). More mature operators well positioned in Australia include TPG Telecom Ltd (ASX: TPM), MNF Group Ltd (ASX: MNF) and Vocus Communications Limited (ASX: VOC).
Shares to avoid
- The resources sector looks likely to remain under pressure in 2016 as plunging earnings and the global shift towards reducing carbon emissions is formalised under the Paris Agreement on climate change. The long-term trend away from fossil fuels combined with short-term oversupply issues means energy and coal businesses like Santos Ltd (ASX: STO), South32 Ltd (ASX: S32) and Whitehaven Coal Limited (ASX: WHC) may remain under selling pressure.
- The professional education and higher-qualifications sector proved flimsy in 2015 as regulatory pressures and greater scrutiny saw Vocation Ltd (ASX: VET) go bankrupt, while Navitas Limited (ASX: NVT) and Academies Australasia Group Ltd (ASX: AKG) also saw significant share price falls. Another recent IPO in IDP Education Ltd (ASX: IEL) has an important year ahead in demonstrating it can operate successfully as a public company.
- Australia's supermarket sector exhibited the first signs of a structural shift in 2015, as Woolworths Limited (ASX: WOW) flagged the potential for profit to be down as much as 28%-35% for the first half of FY16. Woolies and groceries rival Metcash Limited (ASX: MTS) are facing more competition from the likes of Aldi and Costco, both of which specialise in decimating the margins of rivals. No surprises that both these overseas discounters have flagged plans to ramp up expansion in 2016 and the likes of Woolworths and Metcash may continue to struggle under the margin onslaught.
