Our strategy for some time is to go for defensive, income stocks. Two favourites are Telstra and Woolworths, I own both. The income portfolio is furnished with high yielding, defensive stocks and is proving an island in the storm.
I expect this trajectory will continue in 2012 with the possibility the market might overshoot a couple of hundred points on the downside but not for long. I have repeatedly said the 2012 low – just perhaps edging into 2013 – would launch the Teens decade bull market. That low would feel bad, there would be feelings of panic. But just like the post 1987 crash market to January 1991, the market might not fall below previous lows, or much below them. A breech of those lows would simply engender the panic that creates the bottom.
China is very important. Internal infrastructure investment is likely to be boosted in 2012 and will continue to dominate and underpin commodities demand
A soft Europe slows China's exports as that is its largest market. Also a slowing Europe itself will absorb less commodities. But overall I cannot get too bothered, no hard landing, still not looking for a downturn anything like the scale of the GFC... no major credit squeeze! No significant inflation!
As the Top 20 goes, so does the market. Our estimates for the Top 20 give 12.3% upside for 2012 EPS and a further 5.0% for 2013 while our dividend forecast sees the yield increase from 4.9% in 2011 to 5.8% in 2012 and 6.2% in 2013. Those numbers support a potential rise in our Index, possibly to that 20% chance of 5500. But I expect offshore generated fear to keep the indices down and give investors wonderful dividend yields... something I have stressed for some months together with my successful forecast of two 0.25% interest cuts before Christmas.
The market appears cheap, a 25% discount broadly equating to a buy. That discount also tallies with the low market PE. But banks sell on a low PE as they are highly leveraged. The resource stocks are currently selling on low PEs because commodity prices are perceived as high and falling. The market is preparing for a commodities downturn as world growth contracts through 2012/2013.
We are more positive on our resource majors despite our Commodity Forecast – Table 3 – pointing to most prices gradually declining including iron ore at $80 a tonne by 2016 and copper at $3.13. These are still good prices for our majors BHP and RIO. We have oil steady at $100 a barrel, sufficient to support the current immense investment in LNG, shale gas, and liquids from tar sands, coal, biomass and gas.
The US S&P 500 is on a 12.3 PE against consensus 2012 earnings, not expensive. The major bottoms over the last 15/20 years have often been at a PE of 15!