Article / 12 January 2016 at 3:40 GMT

Special Edition: Australian Market Forecast 2016

Trading Desk / Saxo Capital Markets
  • During 2016, the Australian market is expected to continue its downward momentum 
  • The mid-cap sector is likely where outperformance will occur
  • Major retailers and the big-four banks will struggle
  • Materials had a terrible year in 2015 and still face headwinds in 2016
  • The healthcare sector provides investors with a number of opportunities

By Saxo Capital Markets (Australia)

Welcome to our second annual edition of the Australian Market Forecast.

Last year we called the S&P/ASX200 or XJO to underperform global markets and to finish at 4,800 – an expectation not everyone shared but one we thought had merit. We highlighted on three occasions in the latter part of 2015 that the ASX200 tested 4,900 and threatened to break loose to the down side. The last of these threats took place in mid-December when the low of 4,909 was reached. A Christmas rally made our predictions appear more off the mark than the final number would lead you to believe.

This year we are calling our Australian market to continue its downward momentum to 4,550 from its starting point of 5,296. With low GDP growth expected globally, it is not logical to expect our major Australian players to outperform. 

 The insolvency flag is expected to be waved by a number of unprofitable small-cap
mining companies during 2016. Photo: iStock

The small-cap sector, renowned for its serious outperformance in the long run has underperformed the last few years. Littered with unprofitable mining companies, we expect the insolvency flag to be waived by a number of these small guys and subsequently affect its performance. 

Instead it is the mid-cap sector of our market where we expect to find light this year. Mid-cap stocks are not as well covered by analysts and are thus offer pricing imperfections. They can also often have higher growth potential than their bigger siblings and it is this growth potential we wish to exploit. 

At times of low growth, growth companies tend to outperform as investors have a smaller selection of attractive opportunities. Midcaps, unlike small caps, tend to have their operations at profitable levels, providing free cash flow to develop the business while offering rewards for shareholders.


The benchmark S&P/ASX200 Index fell 1.3% last year as the major constituents of the index such as the big four banks, miners and energy stocks struggled. We believe these companies will remain in a low earnings growth environment as the banks continue to be subject to further capital raisings (albeit on a smaller scale) while the materials and the energy sectors will be weighed down by falling commodity prices along with possible dividend cuts. 

Our view remains bearish for AUS200 in 2016 unless we see a significant recovery of the major commodity prices, which is unlikely. As per the attached weekly chart, AUS200 has been trading in an ascending channel B for 2.5 years since the end of 2012, but it was broken in the August selloff last year. 

Furthermore, within this channel, we can also see a head and shoulder pattern (C, D and E) with the neckline B. AUS200 bounced off the long-term uptrend A (since March 2009) twice last year, therefore the major support levels lie between 4,900-5,000, but a clear break-out below this uptrend would trigger a material selloff towards 4,500-4,550, which is near the 38.2% Fibonacci retracement level of the record high 6,851 and the GFC low 3,121.

Source: Saxo Bank

Since AUDUSD broke below the psychological support level 0.70 handle, it has been trading in a consolidation period between 0.74-0.70. Although the primary downtrend A was broken in November last year, AUDUSD has formed a bearish pennant which is a continuation pattern. A breakout of this pennant was inevitable and we would see AUDUSD retesting last year’s low 0.69 handle in the very near term while the previous uptrend of this pennant would act as a resistance level. 

Falling domestic terms of trade would also put the currency under selling pressure and we expect the RBA to hold the cash rate at 2%. However, we would not be too surprised if there is another cut of 25 basis points depending on upcoming economic data such as inflation, GDP and employment changes, which already showed signs of weakness in recent times. 

While we are anticipating the broad US dollar appreciation in 2016, the weakening copper and iron ore prices would continue to dampen AUDUSD.

Unless we see a genuine reversal of commodity prices, AUDUSD is expected to continue to trade below the 0.72 handle, which is expected to be a major pivot level and a breakout below 0.69 handle would signal further depreciation towards 66 cents where we would call the bottom for 2016.

 Source: Saxo Bank

Expectations and stocks to watch

Follows is a breakdown of our expectations for the next 12 months, including stocks we believe will outperform their peers.


There has been a selloff in our banking sector since April. The big four banks set new highs before profit-taking set in. Then there was the regulatory requirement imposed upon the banks requiring capital to be raised in order to secure their "too big to fail" status. 

We expect more capital raising will be needed to meet the industry requirement (albeit on a smaller scale), and foresee another step down for our primary depository takers. In addition, we have seen the property market ease off its highs after a number of implemented changes from government that will affect its loan book. 

Of course this all comes at a time when defaults are at their lowest levels and some are questioning if this can be maintained. Yes, the banks offer an attractive yield but can this yield maintain its recent growth trajectory? Can dividends be maintained at current levels if the banks are required to hold more capital on hand for each loan? 

We do not believe so and this minimises the appeal of banking stocks. We also believe investors are questioning the risk involved for dividends on offer and the fear of capital loss is starting to be realised.

There is more to the financial sector than banks and we feel this is where opportunities lie in this sector. In particular, there are a number of fund managers and REITs that offer promise. Fund managers make their money from management fees and their own market returns. They benefit from economies of scale as costs remain predominately fixed while the number of clients grows.

Those like Magellan (MFG) and BT Investment Management (BTT) have shown consistent outperformance making it easier to bring on new business. We view MFG with a P/E ratio of 24 as being slightly overpriced and would suggest keeping it on a watch list for a retracement to its 100DMA at around $22. BTT, however, has just touched its 100DMA and has a P/E of 20 which looks more appealing.

Consumer discretionary

 Right direction? Myer is waiting to see if its new CEO can deliver the right goods. Photo: iStock

This good old nut has been having a hard time of late. Australians are burdened with high debt levels, meaning there is not the disposable income at hand to splash out for self-indulgence. 

Australian retailers often hedge their currency exposure and as these contracts expire and retailers look to roll these hedges, they will be doing so at less favourable rates given the fall of the AUD. Subsequently, imported goods will cost more and retailers will be forced to raise prices. Higher prices result in softer demand. 

The RBA expects unemployment to reach 6.5% in 2016 and as a byproduct wages growth will naturally be low and perhaps non-existent. Where then, will so many of these retailers who have projected an average sales growth of 5% get this growth from? The collapse of Dick Smith is a sign of the times.

Myer who was threatening an entry on is waiting to see if its new CEO can deliver on a new strategy. At this stage, MYR is only trading on sentiment until reported numbers are released in February. Whether its new direction is successful may take another year to be confirmed. 

Of the listed retailers, we like Premier Investments (PMV:xasx). Major shareholder and chairman Solomon Lew has grown and led a profitable machine. PMV has international expansion offering revenue streams on a weaker AUD. Its school brand – Smiggle – has been an outstanding success and it plans to expand rapidly. We see the market capitalisation of $A2bn and P/E ratio of 21 attractive for this investment opportunity. 

We have also included JB-HI (JBH) on our list of attractive stocks for the second year in a row. JBH is executing its strategy well and offers growth opportunities. Technically JBH is making higher lows and is forming a bullish wedge on the weekly chart.

We also like Aristocrat (AAL). ALL reached a high of $A17.50 before the GFC and is now completing a cup-and-handle chart and trading around $A9.50, which is a bullish signal.

Source: Saxo Bank
Consumer staples

After many years of Coles (WES) and Woolworths (WOW) dominating the consumer staples space, we have now seen the unstoppable force begin to falter. Mid last year, WOW was compelled to downgrade its profit expectations just as international players began to make their next move. 

Aldi supermarkets who have had a small presence in Australia have marketed and positioned themselves well for expansion. Others such as Costco are moving in to capture some of the tasty profit margins on offer. Given the disruption of this market and higher competition, we expect further challenges ahead.

Bellamy’s and Blackmores (BKL) have been star performers in the past year and found their way onto everyone’s watch list. Last year we spoke of the new growth in soft commodities. There is tremendous potential for both these organisations but at what price? 

Bellamy’s closed recently on a P/E of 85 and was recently down 25% in a week. Blackmores has a far greater track record and does not face the same supply difficulties that Bellamy’s does. Bellamy’s, for example, struggles to predict sales in two years due to these restrictions and unpredictability. 

We include BKL on our picks of 2016 as well as a less well-known stock, Tassal Group (TGR). TGR farms Atlantic salmon in Tasmania, has little debt and has grown sales, EPS, NPM and dividends. Its pay-out ratio is only at 41% and has room to grow.

 Source: Saxo Bank


We don’t think anyone is expecting us to have wonderful expectations of an immediate recovery in energy prices. In fact our view on lower oil prices for longer seems to be in consensus with other analysts. 

On one hand we have Opec refusing to lower daily output quotas and are even ignoring its own quotas as it produces 10% more than its own guidelines. Then we have the Americans with whom Opec is playing cat and mouse. Through new innovative technologies, America has refined oil extraction and this has opened a whole new world, which means the country is no longer dependant on global players to provide it with black gold. 

In a landmark move, the US government has looked to remove an export ban on oil as the nation is now past supply levels its own people can consume. In the last piece of the puzzle we have Iran, which can ramp up oil production from 1mln barrels/day to 4mln quickly once international sanctions are lifted. 

All in all, as you have governments trying to maintain revenue and spending, taking on the world’s largest capital market meant a stand-off was always going to play out.

We are choosing to forgo a recommendation in the energy space. There are surely to be winners during the year, however we see the odds are against investors in this sector and there are better opportunities elsewhere.


 The local healthcare industry is recognised as a growth sector and offers a number of opportunities for investors. Photo: iStock

Australia has produced a number of recognised healthcare providers such as CSL, Resmed and Cochlear. The healthcare industry has been recognised for some time as a growth sector given the world's ageing population and developments that allow us to live longer. 

It is also the older segment of the population who have had more opportunity to accumulate wealth and are willing to spend it to maximise their wellbeing. The past one, three and five years have provided handsome returns to investors in this space and while the past is no guarantee of the future, we see this trajectory continuing given higher standards of living on a growing population and fundamental support for the industry. 

Unlike both our mining and banking sectors, which offer a general homogenous product, healthcare affords investors with a greater opportunity for an economic moat and barriers to entry to protect its target market.

Resmed (RMD) has outgrown its midcap status but we believe has the legs to continue offering shareholder returns above the market average. RMD is still underpriced after a heavy selloff in April and May. The selloff came after RMD failed to meet FDA approval on a new product/patient offering. This approval and forecasted sales revenue was not material and the 30% fall was unnecessary. 

The National Heart, Blood and Lung Institute in America estimates 12 million Americans suffer from sleep apnoea. Resmed estimates only 4 million of these seek treatment, offering an untouched 66% of the market. RMD has management with proven integrity and are proactive.

Source: Saxo Bank

We like the outlook of Qantas and continue to believe the stock has further momentum on the upside. Since the breakout in December 2014 from $A2.00, the stock has doubled in price posting a high of $A4.24 in October 2015. Here are two reasons why:

  • Looking at the monthly chart, QAN has broken two major psychological price levels. In February 2015, it broke through the $A3.00 barrier, which was a major resistance level and then followed through in March breaking the 200-monthly moving average, indicating the stock was going higher. To further confirm if this move was valid, QAN retraced back to its 200-monthly moving average and found solid support.
  • Looking at the daily chart, QAN has been consolidating between $A3.50 and $A4.10 for the last eight months and continuing to find support at the 200DMA.

We see a buy on QAN either if it falls to the 200-monthly moving average or holds support on the 200DMA where we’d enter on stop at a fresh high of $A4.25.

 Source: Saxo Bank

Source: Saxo Bank 


Materials have had a terrible year in 2015 and still face headwinds in 2016. After years of massive capital expenditure, an oversupply has flooded the market and the race is on to maximise the net present value of their prior investments – even if it’s to minimise losses on the investment. 

Unlike other booms, the excitement of a commodities boom is often followed by a long painful unwind which takes a number of years to play out. In the end it often involves demand catching up, as well as weaker players closing shop before reasonable returns can be seen again. If BHP and Rio Tinto have just announced a need to raise capital, smaller players will no doubt need to as well … and we’re not so sure they all can. 

A well-diversified Australian portfolio lies victim to this commodities cycle as it needs to maintain a degree of exposure to this sector. Away from the miners, we then have those in building and development as well as in the packaging space. After considering the companies available, we do not feel this sector is worth investment this year.


 Anyone there? Telstra was the only ASX-listed telco that didn't generate
positive returns in 2015. Photo: iStock

For investors looking at our local telecommunication players, we have a juggernaut in Telstra and then a handful of players a fraction of the size to choose from. But an efficient capital market does not allow one player to rule it all. 

Born with a natural advantage, the ownership of infrastructure afforded Telstra the luxury of being a slow mover. It may be of great surprise to our readers to hear that every single telecommunications company on the ASX generated positive returns in 2015 … except Telstra. In its 10% share price fall (near $A7bn was lost), the value was found in the lifting of its competitors' share prices. 

Andrew Penn, the new CEO of Telstra does not seem to be steering the ship as well as his predecessor. Referencing our note on banks, it appears that the search for yield has been affected by the threat of capital loss in this space.

There is no doubt Telstra is a profitable business. There is no doubt it has a substantial client base and there is no doubt a number of our immediate family, friends and colleagues use Telstra, however we favour TPG (TPM) and M2 Group (MTU) as the telco investment of choice. We like that both companies have a good track record of performance. We also like that both are still small enough to move quickly and both are looking at acquisitions to gain economies of scale as well as grow organically. 

Unless there is a regulatory change that only benefits Telstra, we see the smaller telcos have a fantastic opportunity ahead.

 Source: Saxo Bank


When poor sentiment pervades the market, utilities often outperform as investors move towards a stable and predictable revenue source. Utilities also offer an inflation hedge, as the goods they sell matches CPI. 

However, many of our utility companies have an above average P/E compared to the market which raises an important question – how much more can they run? While we see minimal returns in the year to come, for the purposes of diversification we include the sector in our portfolio selection. 

APA Group was our pick of the sector last year and performed well. It now has a P/E of 40.5 and should be considered appealing as a defensive stock for consideration this year. Interestingly,  in its chart, we've identified that when APA retraces from its recent high it pulls back to the Fibonacci level of 23.6%.

In addition to APA, we've selected Mighty River Power (MYT). MYT supplies New Zealand with around 20% of its power supply and has a strong competitive advantage due to its low cost and vertical integration.

 Source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more 

– Edited by Gayle Bryant

The Australian Market Forecast 2016 was compiled by the Sydney trading desk at Saxo Capital Markets. Post your comment below to engage with Saxo Bank's social trading platform.


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