2018 was a bit of a dud for investors.
Deutsche Bank produced a report showing that 90% of the asset classes fell in 2018.
US and Aussie stocks certainly finished down.
Not for you!
You’re lucky! You have a very compelling opportunity to make money this year.
Markets are on sale.
You can now step in and buy up stocks trading at much cheaper valuations…and position for a bounce back.
There’s an old adage in the stock market: The lower price you pay, the bigger your potential return.
Yep — it might even feel ‘wrong’ to be buying, what with all the scary headlines around the world at the moment.
But nobody said investing was a breeze. You’re supposed to buy fear —and sell greed.
And if you’re in a buying mood, 2019 could be a doozy to the upside if the trends I’m tracking play out.
In the weekend edition of 2019 I’m going to show you three specific opportunities.
#1: Aussie Market — Back Over 6,000
Did you know the ASX/200 hit a 10 year high in 2018?
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Yep — the first half of the year in the market was right on track.
Then things fell apart after August.
The Royal Commission into the banking sector, mostly.
Now, I don’t want to completely dismiss other issues impacting the market, like the Chinese-US trade war.
However, the ugly revelations around the major banks put extreme selling pressure on their share prices.
That’s bad news for the Aussie index — the big four banks make up nearly a quarter of the index.
If you throw in the slowing property market as well, it’s no wonder bank shares took a big hit.
My view is that these issues are now mostly priced in.
I expect the big four banks to bounce — or at least hold — around the levels they are now.
So, where’s the upside for the market going to come from?
The mining sector!
Okay…let me explain…
The Aussie dollar is now dangerously close to going under 70 U.S. cents. It was more than 80 cents in late 2017.
We can debate the relative merits of this all-day long. But there’s one indisputable fact…
It makes companies earning US dollars more attractive to Aussie investors.
And all commodities trade in US dollars.
It’s a global market.
The effect I’m talking about is really easy to see in gold shares.
The US dollar gold price is currently around US$1,280.
That’s not really that exciting if you’re American.
But the falling Aussie dollar turbocharges the price for us here. At the time of writing, an ounce of gold currently goes for around AU$1,830!
Aussie gold miners, with a reasonable cost base, can make very good margins at this price point.
It’s a great example of how currency moves can be really powerful for mining companies.
Australia is shipping out a lot of coal, iron ore and LNG at the moment.
In fact, 2018-2019 could see record export income from resources and energy.
If this happens it will likely show up in strong earnings for the relevant producers on the ASX…and help lift the Aussie market back up over 6000 points.
We could even go into
all-time new highs this year
One thing that has suppressed the Australian stock market this decade is that the big mining stocks and big four banks have not really moved together.
Bank stocks were strong from around 2012-2015. Mining stocks were weak.
Then the miners began to move up over 2016-2018 while bank shares retreated.
I think 2019 is the year both sectors move up together…and deliver a strong market.
The Aussie dollar took a big hit in late 2018 — falling 13% from the August high to the December low point.
I say buy the dip.
You could consider an Exchange Traded Fund (ETF). These hold a basket of stocks, like a mutual fund, but you can buy and sell as simply as a normal share.
One to consider is the BetaShares Australia 200 ETF [ASX:A200].
This holds the top 200 companies on the ASX. It’s a very straightforward and low-cost way to position yourself for a rising Australian stock market.
Check out the specs here.
Please note this is not a recommendation. But it’s certainly a starting point for your own further research, or an idea to discuss with your financial adviser.
There are many other similar ETFs to the BetaShares one as well.
But look around. You want to minimise fees as much as possible.
The main point of my report today is that the Aussie stock market has much more upside potential than most people think.
That brings me to my second profit opportunity…
#2: The US Market Bounce-Back
US stocks delivered their first down year in a decade last year.
I expect the Dow to bounce back in a big way in 2019 — which could really help lift the Aussie market.
Donald Trump’s aggressive trade initiative against China upset the apple cart in 2018. Investors hate uncertainty, and Trump gave them plenty of it.
Volatility returned in 2018, too, which was notably absent in 2017. That makes for wild swings and conflicting signals for all of us to work out what’s happening.
However, one thing stands out amongst all of this: US stocks are now historically cheap.
Currently, the US market is trading around 15 times forward earnings.
The average price-to-earnings (P/E) of the US is about 20.
So, there’s plenty of room for the market to go up and still not be considered ‘expensive’.
Some US sectors are sitting under this modest figure. These are enticing arguably the greatest investor of all-time, Warren Buffett.
Regulatory filings revealed that Buffett loaded up on US bank shares in the third quarter of 2018.
Buffett has sixty years of experience in the investment business. His record of longevity and wealth creation is unparalleled.
And he was BUYING in 2018’s difficult market.
I suggest following his lead is a wise path = provided you have a reasonable holding period in mind.
Volatility can make for a wild ride, so do keep this in mind.
Want another reason to be bullish on the market in 2019?
Just look at the recent ‘sell-off’…
In my view, this looks like a technical sell off, not an economic one.
This is a really important distinction.
What I’m saying is I don’t see a raft of downgrades suggesting a weakening outlook for earnings.
It looks more like uncertainly and volatility hitting the market.
These kinds of clouds can pass.
Let me show you what I mean…
In Wednesday’s Profit Watch I showed you a chart from my colleagues at Stanberry Research.
Here it is again. It shows all the drawdowns in US stocks since 1965. It also puts the recent one into historical context:
Source: Income Intelligence, Stansberry Research
You can see the recent sell-off is pretty sharp.
Now here’s where a bit of economics history can come in handy (though most people are oblivious to this).
The bigger falls that you can see — for example, in 1973-74, 1979, 2003 and 2008 — were much more difficult periods than we’re going through right now.
But this is why I have 1998 on my mind…
You see, US stocks took a pummelling in the middle of 1998 as well.
They fell just under 20% from July to August.
At that stage, stocks had been in a bull market for years, like today.
In the aftermath of such a drop, it would have been easy to think that was the end of the road for stocks.
Let’s not forget, in 1998, the Asian Financial Crisis was still playing out and Russia defaulted on its debt.
Scary headlines at the time.
But the market didn’t think so. The Dow Jones would rise another 50% before topping out in 2000.
Easy to see in hindsight. But there was nothing obvious about such an outcome at the time.
I think there’s a higher likelihood of something similar playing out from here today than further big falls across the markets, like 2008.
It’s likely to be volatile, no doubt. But in my view the risk is worth it if you can hang on. The final years of a bull market often have the biggest gains.
So where should you look?
You could consider buying some US shares.
Or perhaps pick up another ETF that covers the US market.
One to consider is the Vanguard US Total Market Shares Index [ASX:VTS].
You can find more information about that here.
Again, this is not a recommendation. It’s an idea for you to do some homework on and discuss with your financial planner. Like the previous ETF suggestion, VTS has low fees, which is what you want to look for.
A lot of wealth is created in the United States. This is one idea to tap into it.
And that brings me to a kind of ‘wildcard’ market for you to consider this year…
#3: ‘Black Gold’ Shares: Cheap and
Hated — But for How Long?
If you’re up for a speculative punt in the market,then I suggest you keep a close eye on oil stocks in 2019.
This is something I’ve repeatedly covered in my investment letter Small Cap Alpha.
Oil is a volatile beast, no doubt.
At one point in 2018, Brent crude went over US$80 a barrel.
By the end of the year, it was under US$55!
But some of the underlying trends I’ve been tracking in this market suggest another bull-run in oil is highly probable this year, or 2020 at the latest.
One reason is that, since 2014, there’s been little investment in replacing ageing fields across the globe.
But every year we keep consuming oil at high rates.
There’s also a new environmental rule due to come into effect in January 2020.
Global ships will be required to burn ‘clean fuel’ — not the highly polluting stuff they use now.
It might sound obscure — actually, it is obscure — but this is going to stress the global refining industries’ available supply of diesel.
This has the potential to cause a scramble for a certain type of oil.
You might be surprised to know that oil from Saudi Arabia is often very different to oil from, say, the US.
That aside, oil prices could come under pressure if economic growth strengthens, as I expect.
And yet investors have little interest in oil shares. That means they trade pretty cheaply, relative to previous periods in history.
And yet many of them have lowered their cost bases in recent years.
That means if oil does run-up, as I expect, the margins could be huge.
That’s a recipe for oil drillers’ share prices to potentially race up.
You could also consider companies that have active drilling programs. If they hit oil, you can get a big lift from that too.
Of course, I may be wrong. Oil could fall lower, dragging associated shares down with it.
Like I say: This is not a sector to go heavily into without strict risk management.
One speculative stock to keep any eye on is Byron Energy Limited [ASX:BYE]. It’s an oil and gas producer operating in the Gulf of Mexico. It’s also drilling for more oil over 2019.
If it hits what it’s looking for, we could potentially see a big spike in the share price.
As I write, Byron has also not ‘hedged’ its current production. That means it takes the current selling price of oil as it goes. If oil goes up, it makes more money.
Of course, if oil goes down, it makes less. The share price will move accordingly.
(To clarify, some oil companies sell their future production at a fixed price in the future. This locks in their revenue regardless of what the ‘spot’ price does. It’s a defensive move, generally, limiting the potential gain from the stock.)
Again, please don’t treat this as a formal buy recommendation here. I can’t keep you updated or give you full risk assessment (if you want that, take your obligation trial-run of Small Cap Alpha).
As with the other suggestions, it’s designed to springboard your own further investigations.
There are a number of compelling oil stocks on the ASX at the moment, each with their own attributes, and each worthy of your further research.
Here’s a good list of the oil-related stocks on the ASX. It’s a mix of larger and smaller companies:
- BHP Group Limited [ASX:BHP]
- Otto Energy Limited [ASX:OEL]
- Freedom Oil and Gas Limited [ASX:FDM]
- Karoon Gas Australia Limited [ASX:KAR]
- Santos Limited [ASX:STO]
- Sino Gas & Energy Holdings Limited [ASX:SEH]
- Oil Search Limited [ASX:OSH]
- Woodside Petroleum Limited [ASX:WPL]
It’s an exciting sector, and worth you looking into.
So, there you have it.
Three of my top investment ideas for 2019.
Let’s book mark this edition and see how we fare come the end of the year.
But between now and then, why not give my dedicated small cap research a go?
If you like what you’ve read here, I’m sure you’ll get a lot out of it. And hey, if you don’t think so after coming onboard, you can get your subscription money back in full within 30 days.
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Have a great weekend!
All the best,