There are some interesting trends driving global markets at the moment. Here are four themes we think investors should pay attention to.
1. Low earnings growth is fuelling M&A
There’s virtually no earnings growth in the top 100 stocks at the moment. Our forecast for calendar year 2016 is -2% earnings per share growth, which is unusually low. By contrast, we’re seeing some small cap stocks growing their revenue at 30-40% per year.
Big listed companies are looking to buy earnings growth and, with credit being cheap, mergers and acquisitions are back with a vengeance. Private equity is also looking for large listed targets. Just in the last few weeks, Hitachi Construction Machinery bought Australian mining supplier Bradken Limited and SAI Global Limited was snapped up by private equity. Often the M&A targets are companies whose balance sheets are in reasonable shape, which means the buyers aren’t taking on a lot of debt.
2. Cheap global energy
A combination of shale, domestic batteries and renewable energies could rip the old energy production and distribution systems to shreds. The Saudis have realised their oil can’t compete with shale and therefore slowed production. There are a lot of cheap alternate energy sources to oil out there, and as energy gets cheaper, the world gets more innovative. We think cheap energy is going to be a major disruptor.
3. Era of software and robotic disruption
The business cycle is getting faster and faster. Businesses used to look decades ahead; now it seems to be months ahead – not even years! Smart businesses are trying to keep ahead of the game by working out how they will now get disrupted. For example, SEEK.com and Carsales.com disrupted newspapers virtually overnight, and are now thinking who, in turn, will disrupt them.
High end professional services, like law or medicine, are as much at risk of disruption by technology and robotic software as those provided by blue collar workers. No one is immune, except maybe creatives (eg makers of games and apps).
4. A resurgence of populism and nationalism
The impact of the trend towards nationalism is stock specific, but serious. For example, some weeks ago, the Philippines said they would stop most nickel and gold mining in their country. Non- Philippines based nickel stocks rose sharply on fears of disruption to supply. The resurgence of nationalism seems to be happening increasingly, and the world is becoming much more protectionist. It’s a trend to watch, because it has the potential to disrupt the global economy – and, of course, it will also create investment opportunities.
Source: nab asset management
Author: Fairview Equity Partners
Fairview Equity Partner is a fund manager that invests exclusively in Australian smaller companies. fairviewequity.com.au
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