Markets usually move in cycles, and they can move slowly. It's rare that an event has a one-off impact with no follow up. Here are 6 things I expect to affect the market in 2018:
- Continued pressure on the franchise business model
Retail Food Group Limited (ASX: RFG) and Domino's Pizza Enterprises Ltd. (ASX: DMP) have been repeatedly criticised in the media over their franchising practices, but neither appears to have been very active in reforming. Domino's delayed publishing its internal audit into underpayments, although I'd expect it will come out with the February results.
Collins Foods Ltd (ASX: CKF) seemingly hasn't had any problems yet, so it just goes to show it is possible to run a profitable fast food restaurant.
- The prospect of rising interest rates
Higher rates will increase in the value of the 'float' at insurers like Insurance Australia Group Ltd (ASX: IAG) and Medibank Private Ltd (ASX: MPL) by increasing the yield on their bonds. It will also increase the pressure on heavily indebted companies like Sydney Airports Holdings Pty Ltd (ASX: SYD).
- Medibank will continue to be mediocre
I wrote recently that the quality of Medibank's earnings was low and high investment income was unlikely to be repeated, even if interest rates rise. At today's prices of $3.20 I struggle to see the company being a big winner.
- 'Hot' companies will continue to be popular
Investors will continue to buy many companies with strong revenue growth, or promised strong revenue growth, even if the company's valuation seems out of control. I expect at least one or two of these may stumble if they fail to live up to lofty expectations.
- Australian retail will continue to be questionable
While jobs growth is picking up, with so much consumer debt out there and the increasing competition from ecommerce giants like Amazon, it's hard to see bricks and mortar retailers being a huge winner. Home-grown ecommerce business Kogan.com Ltd (ASX: KGN) could be one to watch, although it carries a lofty valuation.
- A possible construction slump?
A number of media outlets have been reporting studies and experts predicting a slump in property and apartment construction in Australia's largest cities. The severity of this will be unknown given that property prices remain high (encouraging building efforts) but a slowdown in construction could hit a number of things including bank lending, employment, and consumer spending.
