What’s ahead in 2018?

This week James Kirby and I reflect on our best and worst investments of the year, and then move onto what punters can expect from house prices, stocks, bitcoin and more in the new year.


Hello, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

And, Alan, it is, believe it or not the last Money Café of the year.  We’re hoping our many listeners and fans will listen to this and perhaps listen to it over the break, and so it has some element of review, this episode folks, because we’re going to look back over the year and more importantly I think we’re going to look ahead and say, or at least suggest to you, what might be coming down the line.  But, before we start on some of the topics of the day I thought it would be a good idea, Alan, for both of us to not so much do a mea culpa but to give a little revelation, a little peak inside our personal portfolios and tell the listeners what was the best and what was the worst stock you had this year.  Why don’t you tell us what was your best stock this year in terms of percentage, return and what was your worst and why, why do you think it turned out that way?

Well, my entire portfolio is a stinking bag of poo as a matter of fact. 

I’m sure that’s not true.

It’s hard to find.

You’re counter-cyclical this year. 

Dear or dear.  Anyway, suffice to say that my best stock was Transurban which is up about 30% so I haven’t got any doubles, haven’t got any ten baggers, five baggers, any of that.  Transurban up 30%.  I bought Transurban because they get to increase their tolls at CPI plus and they’re adding toll roads all the time.  So, I think it’s an absolute no-brainer and it’s a good well-managed company.

And they seem to be very well managed.  But, how come it did so nicely this year?

Well, I think everyone is anticipating the Melbourne tunnels, the extras, and also adding the Sydney toll roads to them and so I just think that they’re – and also there’s a flight to quality going on and I think it’s definitely a quality stock.

You think there’s a flight of quality going on?

I think so.

Yeah.

You know, but not the conventional quality, not the big quality of the banks, say.  You know, people have been getting out of the banks this year and looking for something else that’s going to pay a decent dividend and that’s a decent quality stock, and Transurban is one of those.  My worst stock has been a little thing called Invigor which happily I didn’t put much in but it’s gone from 2 cents to 0.8 cents.  What Invigor does is it helps shopkeepers get to know their customers through traffic data in the store. 

Sounds good technically.

Well I thought all these desperate shopkeepers and retailers would be trying to look after their foot traffic in the stores in anticipation of Amazon and that this thing would go off but it has not, that’s all I can say.

I remember one time you and I were on stage with Kerr Neilson years ago and he had this fantastic thing that he always went back and looked at the stocks that didn’t work and he thought it was as important to look at the ones that didn’t work as the ones that worked, though of course emotionally that’s much more difficult.  But, any idea why in particular it didn’t fly?

Look, to be honest it’s dead to me.

Yeah, that’s what I’m saying, you see.  Emotionally it’s much more difficult to look at the ones that failed you, isn’t it?

I know, it’s dead to me, I’m not interested.  I mean there’s a stock I’ve put more money into called Vivid Technology which has done nothing all year, at least it hasn’t gone down but it’s stuck at around 4 cents and I do expect it to go off.

So, you have belief in that but you’ve lost belief in the other one.

I do, yes.

Yeah, that’s the difference, isn’t it?

Anyway, so what about you, what are yours?

Well I don’t actually have – well I follow small caps and I enjoy your coverage, your interviews with the various small cap people, but I’m very selective at the end of the day.  I mean I might have six small caps maybe, that’s about it.  Don’t you know the nature of these things, one of them was a beauty and one of them was really disappointing.  The one that was great was Afterpay which started at the start of the year as – well it’s a very simple thing, it’s online layby, and it’s a beautiful thing financially, [0:05:02.5] socially, because people online can buy and layby and it’s quick finance basically for small product sales.  I came upon it not in terms of stockbroking but I came across it, if you like, in daily life first.  I thought wow, that’s good, and then I looked at the stock reports and they were really good, and they were pretty convincing as a lot of stock reports are. 

You didn’t find it as a result of my interview with the bloke?

I think I knew about it long before that actually but that was very good and it’s doubled in price which is really good.  It took over another company during the year and it got rewarded for that which doesn’t always happen.  My dog of the year, which I will kick myself for because I knew even at the start of this year that it was not looking good, is a little company called iCar Asia, a little company getting littler by the week.

Is this the Carsales of Asia?

Yeah, it was…

And is it part owned by Carsales?

Well, the great hope, my security I thought, was that it was part owned by Carsales, they have a stake in it, yeah.  But, they’ve never done anything with it and they’ve never upped it and they’ve never put anything into it.

Are you going to stick with it?

I don’t know, I’ve lost so much at this stage.  I think I got it for 80 cents or more than that and I think it’s about 30, something like that.  It’s a very difficult decision.  Because when you sell you admit defeat, don’t you, that’s the killer.

Yes, but the big mistake that individual investors always make is to sell their good stocks and hang onto their bad ones.

Yeah, I’m quite good at selling stocks I’m disappointed with.  I’ve read a few reports recently and of course they are still saying that iCar Asia has some hope but that Carsales may make a move, and if they do it’ll go up 30% in a day.  I’m sort of waiting for that but yes, I remain wedded to it though may not be the most sensible thing.  So that’s our two.

So, end of our Catholic confessional there.

That’s the end of the confession, you can step out and ask the next person to come in.

Forgive us father, we have sinned.

Now, more broadly, Alan, first thing’s first, what dictates so much, dictates the markets, dictates house prices, is rates.  Where are we going on rates in 2018?

Well, in Australia I’d say nowhere.  My prediction, which is not shared by everybody but some, is that the Australian cash rate will not move next year.

Shared by Bill Evans, right, Chief Economist at Westpac.

Yeah, a few people think that.

But, some of them are saying, like HSBC, are saying first quarter.

Yeah, I can’t see it.  We had the Fed funds rate go up 1.5% on Thursday morning our time – to 1.5%.

To 1.5%, yeah.

We’re in the interesting situation now where the policy interest rates of both America and Australia are the same now, 1.5%, which is a rare event and the last time that the American interest rate went above Australia’s, which it is now going to do some time early next year…

Yeah, it really looks like it, doesn’t it, yeah.  We were talking about the bonds last week and…

The last time that happened was 2000 briefly when American interest rates were jacked up to try to cool off the internet bubble and the Australian Dollar as a result of that partly, not entirely but partly as a result of that, the Australian Dollar went down to below 50 cents. 

Yeah, so as the money gets pulled out of Australia, is that it.

Well, it’s the end of what’s called the carry trade.  When interest rates here are above those in America in particular there is a carry trade where you can just have your US money sitting in Australia and you get an interest rate arbitrage difference between the two interest rates and you just have a carry.  That’s kind of disappearing or at least going negative next year.

You think is that game over then?

For the time being it is, sure.

What that means then is the money goes back to the US which means our dollar drops, so are you saying the dollar is going to drop next year then?

Most likely, I think it’s much more likely to go down than up largely as a result of the disappearance of the carry trade.  A lot depends then on what happens to commodity prices and therefore the Chinese economy, and that’s a bit of an unknown obviously.  I mean I think China is looking fine and the commodity prices will be stable and if not higher.  That will kind of pull against that and could possibly prevent the Australian Dollar going down below 70.  I don’t think for a moment the Australian Dollar is going to go below 50 again as a result of the loss of the carry trade but it could go below 70 maybe.

Okay, so it’s not necessarily a bad thing, is it?

No, that’s right, of course.

If we have stable rates, a dollar that was dropping but not dramatically it’s not necessarily a bad thing, is it?

And I think that’s one of the reasons that the Reserve Bank will be in no hurry to chase American interest rates up.  They will be happy to sit there, sit back for a while and let the Australian Dollar fall to encourage tourism in Australia and manufacturing industry, exports in general, to try to get employment and growth going.

I suppose for a lot of people listening to this are investors, they’re going to say what does it mean for the price of my house or what does it mean for the price for any investment property that you have?  I mean there’s a lot of doom and gloom in the headlines but if it’s the case that rates are stable and if unemployment is actually possibly getting better, that is the figure was getting lower, maybe go to 5 from 5.5, a lot of people are saying that the minute to midnight and all this sort of thing about house prices.  I’m of the view that it’s a soft patch but I don’t think it’s going to be much worse than that.

Totally, I mean I think what we are getting, it would seem, is a soft landing in the housing market in Australia and even in Sydney.  I reckon that they’ll be building statues to Wayne Buyers, I mean he has pulled off…

With the macroprudential.

Yeah.

He never moved the rates but he cooled the housing market.

Wayne Buyers, who is the Chairman of APRA, has brought about, as a result of leaning on the banks to cut back their lending, has brought about a soft landing.  Actually, the Reserve Bank couldn’t do it because they couldn’t put up interest rates in the context of almost zero inflation.

Such a weak economy, yeah.

They couldn’t do it.  The Reserve Bank could do nothing and Wayne Buyers has stepped up and pulled it off, I reckon it’s fantastic really.

Yeah, I tend to be of the same opinion though I don’t know – I mean there’s obviously patches.  Brisbane, parts of Melbourne, parts of Sydney, inner-city apartment market.

Sure, and Brisbane apartment prices are falling now, that’s true, and look there’ll be patches, exactly, there’ll be falling.  Sydney house prices are slowing and I think if my memory serves me in the last month they actually fell by a bit, 0.1%.

Yeah, which is, you know, soft.

You could end up seeing a 10% decline in Sydney house prices on the median but that’s okay, that’s what happens, they’ve still gone up a lot.

Yeah, everyone knows that it was running very hot.

The other big topic this year, James, which you’re all over is superannuation.  What’s happened this year?

I think we should have a look at that.  We’ll talk about housing and we’ll talk about the stock market in a second but the other thing I’m sure every listener is interested in is super, and what happened and what’s going to happen.  The big thing of course – there was two actual very large changes in super this year, very large.  First of all they taxed pension income for the first time ever.  The second thing is that they put severe, and I mean really tight caps on how much you could put away into super before tax and after tax.  I think first of all we know that’s happened but I think the outcome of it is next year you’re going to see people really starting to explore anything they can to get a tax deduction because the traditional one was super and it’s gone, or it’s effectively gone for a lot of people.  I think you could see people starting to gear into shares again for instance for the first time in a long time.

God forbid that anyone will actually pay their tax.

Well it is entirely reasonable to be tax efficient, Alan, you don’t want to be tax silly, you don’t want to be paying tax when you don’t have to.

No, I pay more than I’m supposed to, would you believe that?

I bet I pay more, well I feel like I pay more than I’m supposed to.

Yeah, me too.  That’s right.

We were just talking, no matter what happens tax rates are going to be 50% effectively, effectively 49% under Labor and 47.5% under the Libs.  So, really we’re looking at gigantic tax rates.

Negative gearing, mate.

Negative gearing, yes I know, but house prices if they’re flat negative gearing…

Still get the tax deduction.

I know but the rates aren’t high enough to get the tax deduction.  I think that’s something we’ll be talking about much more next year, about that.

Yeah.

That’s I think well worth just keeping in mind.  The other thing that was huge and it was very subtle, and people didn’t really see it coming was they did a very subtle but mean change on pension access.  The means test, they really changed that, and a lot of people – it’s absurd but if you have $400,000 in super you are going to better – a couple with $400,000 in super are better off than a couple with $800,000 in super.

Really?

Yeah, if you have $400,000 in super as a couple with your Centrelink payments and everything you get about $50,000 a year, and if you have $800,000 in super assuming a 5% rate you get about $42,000 in super.  That’s crazy, it’s absurd.  The thing to do is don’t get stuck in the middle.  Either say to yourself I’m going to have $400,000 in super or so, and I’m going to access Centrelink, or I’m going to have more than $800,000.  But, people in the middle there they’re losing.

Right, so you’re better off blowing it or giving it to the kids.

Yeah, you can take that approach.  I mean obviously you’re dependent on the government, some people don’t like that, but I’m telling you they’re the numbers, we have done them about five different times in five different ways on The Australian.  I had James Gerrard just write about it again last Saturday.  Okay, so they’re the big things on super, now let’s have a look at the market for the year ahead.  Before we look at generally across the market the big story of the week, and one of the biggest stories of the year, is Westfield.  I think we might make this our BT Mega Trend of the week; the future of the shopping mall.  I mean you’ve got to think if the Lowys really believed that shopping malls were a good investment why would they sell to some unknown French conglomerate?

That’s it.  Everyone is kind of focussing on Frank Lowy, and Frank Lowy is selling out and all this stuff.  Frank’s old, right.  I mean it’s Stephen and Peter, that’s the point.

That’s my question.  Why would they, at the peak of their careers, sell out of a business they know inside out?

Well, because they reckon the business is stuffed obviously.

Yeah, stuffed is it?  Stuffed is quite a call.

Well, okay.

But, I mean where is it going?

Well, how shall we put it, the shopping mall business is challenged.

It is.

And the thing is that Westfield has very good shopping centres, I mean they’re tier one, right.  What does that mean?  It means they’re nice to go to and they’ve got lots of restaurants and cafes, and the people are tending to go there other than simply to pick up the groceries.  They’re actually going to experience and so on, and that’s fine.

Experience, whatever that experience might be.

Whereas tier two and tier three shopping malls you don’t do that, you just go there to do your shopping and those places probably are in trouble.

They might all be in trouble, I mean because that’s what, the Lowys are in the tier one, aren’t they?

Yeah they are, that’s right.

They’re getting out too.

Exactly, but I mean what they’re saying is it’s not because we think the business is buggered, it’s because we think well, it’s because Frank Lowy says he’s sick of being hounded in the public and all this stuff.

Yeah, I mean he’s been doing it for 40 years.

What rubbish, come on.

Yeah, I agree it’s rubbish, it is too.

What’s more he’s been paying himself whopping great salaries of like 30 billion a year or something and he was shamed a while ago into contributing most or all of his salary to the Lowy Institute, which is how that joint was set up.

That’s right.  But, the other thing about these families is one thing the top families, the richest families have in common is they have a marvellous sense of timing, of when to get in and when to get out.  Tell me it’s a coincidence that the Besen Family in Melbourne, who used to own Highpoint, have sold out and the Lowy Family who own Westfield have sold out.  When you see those families getting out of a business they have a sixth sense on timing and they have superb advice, they have the best advisors in the business.  I think we’re on track here about shopping centres.

Yeah, of course.

They’re not what they used to be.  Now, across the market I was just looking at what happened last year and what the projections are for next year.  For what it’s worth everybody in a nutshell Australian stock market did about 13% last year, so at 9% on price, there or thereabouts, and about 4% on dividends.  Interestingly your consensus is more or less the same next year, 9% or 10% on stock prices and maybe 4% on dividends.  That’s 13%-14%.

I don’t suppose you know what the consensus this time last year was for this year do you?

The consensus, it wasn’t 13%, I’ll tell you that.  I can remember it was pretty mixed, it wasn’t anything as bullish as it turned out and you can see them all saying in the last few days…

Well, 13% is a lot less than the global market and the American market.

I know, yes.

I mean Australia has substantially underperformed mainly because of the banks which have had a shocker.

Yes, Alan, but 13% is 13%, it’s alright by me.

Okay, but there’s also…

I mean I’m not sitting there going tut tut tut, I wish I lived in Detroit and I had an American stock portfolio.  I’m happy with 13%, that’s not bad.  Cash is only 2%.

Alright, I’m unhappy that I didn’t have all my money in Afterpay and it’s doubled, that’s what I’m not happy about.

But, the point I was going to make was…

Or Bitcoin.

Or Bitcoin, yes.  But before we talk about Bitcoin the other part of the market is that mining stocks last year, while the general market by the prices did about 10%, the stock prices did 10%, mining stocks did about 16% last year.  You’ve got to think next year is going to be pretty good too.

Sure, you do actually.  I mean this is the time to own what the professionals call cyclicals which is mining among other things.

Why do you think mining is going to power up?

Because of China, China is fine.

Yeah, China is stabilising.

But also all of the big miners have got their costs really well under control.  I mean they have robotised their mines and their operations, the costs are really low, they’ve taken the opportunity to really attack the costs and I think they’re pretty efficient businesses now.  Yeah I think also the miners have turned themselves into income stocks, they’re paying these whopping dividends.

Yes, you’re getting dividends too.

I mean Fortescue’s yield is like 9%, heavens above.

What about oil?

Well, interesting.  I thought that oil’s cap ceiling price would be US$50 a barrel because every time OPEC tried to do something to restrict production the American shale producers all came in and flooded the market and pushed it down again.  Then, bugger me, the price went up to $60. 

That’s right, did they actually deliver then, OPEC?

Well they are, they’re delivering.  I mean they are actually delivering some discipline.

Who would have thought that gang would agree with each other?

For the first time in a long time OPEC is actually managing to get the price up but that doesn’t change the basic structure of the market which is firstly that the American shale producers are there, every time the price goes up they all flood into the market to increase production.  The other thing is that consumption of fossil fuels in general is in decline, including oil.  We’re clearly heading towards the tipping point on electric vehicles.

Yeah, but why is oil going up then?

Because the OPEC is restricting production.  It’s manipulated at the moment but the fundamentals, in my view, of the market – I mean, look there are a few peak oil diehards around who are still predicting a big oil price but I think that the way that we’re going on electric vehicles with countries now saying they’re going to ban internal combustion engines because of air quality, and China in particular.

If you’re an Australian and you want to play into this electric cars the big miners aren’t in it, right, Rio aren’t in it.  I mean they’ve got copper but the big miners, BHP…

That’s right.

They’ve missed it, right so far.

Yeah.

How do you get into electric cars?

The big miners are going to have to come and overpay for lithium, nickel and cobalt miners, they’re going to have to pay whopping great prices as they always do.  They come in and splurge on these things.

It could be the takeover buzz of next year, that and of course China coming in and they just got the green light again.

I hadn’t thought of that, BHP or Rio are going to say okay, well it’s time we cornered the lithium market and they’ll mop up half a dozen lithium producers.

Out of petty cash they’ll do it, it depends on how big they are.  One other story before we move onto the delicious and endlessly entertaining issue of Bitcoin, one of the most shorted stocks this year was Syrah Resources.  All through the winter when we were doing this podcast the number one most shorted stock was Syrah Resources and it’s shot the lights out.  It’s a graphite producer and they’ve come out the other side.  A lot of shorts lost a lot of money there.  I’m afraid just because something is shorted doesn’t mean it’s going to go down, folks.  Okay, very good.  Now for our question of the week we have an in-house question here, folks, it’s something of a Dorothy Dixer, but it’s from our colleague, David Swan, technology writer on The Australian who we did have on in summer there when I was away. 

There’s a great story, can I briefly tell David’s story because he told me this story.  He was in Las Vegas, he was at an exhibition or a trade show and he got the new Samsung, you see, and then he went downstairs and there was some other outfit.  It was a big trade show with all these guys standing around.  They said enter a competition with the new Samsung and you could win some Bitcoin.  He was one of the first people that – if I’ve got the story right, I hope he doesn’t have to correct me on all this but he told me this one day.  He went in with his new Samsung, entered the competition and he won 0.6 of a Bitcoin.  This is approximately a year ago, thereabouts.

Right.

Here we are a year later.

A year ago it would have been worth about $500.

Yeah.  young David now has 0.6 of a Bitcoin which is $17,000, let’s call it $20,000 Australian at least as we speak.  he has asked us what would be a wise strategy for his Bitcoin.  Should he get out now or hang on?

Yes, well what do you think, James, you go first.

I think I’m going to give the great old standby for this sort of thing, which actually I have no problem with, I’ve done it in the past and it’s paid off.  Sell half of them, David, and hang onto the other half.

Yeah, I couldn’t disagree with that.  That sounds okay.  The alternative is to take your money and run a mile.

I know.  Well, yes but didn’t you have…

Or, the other alternative is to hang on and go for the ride, who knows.  I had a bloke the other day I interviewed who said it was going to $100,000 per Bitcoin.

Saxo Bank said it was going to $60,000 just the other day, and they’re a Danish bank, registered European major bank.  I suppose the only reason I’m even – if it was the case that you could never buy it again then I would say hang on tight but the fact is it’s openly traded so I think he could do that assuming he wants to do something sensible.

Maybe what he should do is sell his Bitcoin and buy Lite Coin.

No, he shouldn’t, he shouldn’t buy Lite Coin or anything coin, no, no, no.

Lite Coin is the new hot one, mate.

No, there’s only one and that’s Bitcoin.

Well, no there’s not only one, there’s 1,343.

And they are all going to be history soon.  I must say whatever about Bitcoin I personally wouldn’t touch the others with a barge pole, David.  But, he leaves us with one other question, Alan, which is hard to answer.  What does he do with the money, what does he do with the $10,000 he cashes out of Bitcoin?  And we can’t say something really boring like buy an ETF.

Buy a car.

Buy a car, have some fun David, have some fun.

Go to Europe.  Yeah, in fact fly business class to Europe, there you go.

You hit the jackpot, go to Las Vegas for a week.  Okay, well maybe we’ll leave it at that with David and we leave it there for the year, Alan.  I think we have to say goodbye to everyone.  We absolutely love doing this podcast, we are delighted particularly with your questions, do send them in next year.  We’re going to be back soon after Christmas, aren’t we?

Mid-January.

Mid-January, do we have a date producer Eric?  I should have written the date down.  Somewhere close to the 18th.  We will let you know, that’s a Thursday.

Which will be some time in mid-January, that will be our 46th episode.

46th episode, that’s right, we started back in February.  Thank you everybody for the year, we wish you the very best for the holidays and until next year I am James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, Publisher of The Constant Investor.

Thank you and goodbye.