A Look Back at 2012
Owain Bennallack and Nate Weisshaar reflect on 2012 and the events that shaped the year's investing landscape, including China's "hard landing" that never transpired, as well as the economic stimulus applied in the U.K. and U.S. The two Fools also charted a share each that they tipped for success at the beginning of the year and see how they performed and look ahead to 2013 in this MoneyTalk podcast. [Note: this podcast was recorded mid-December 2012.]
EDITOR'S NOTE: What follows is a lightly edited transcript of Owain Bennallack and Nate Weisshaar's conversation.
Owain: Hello, and welcome to another podcast from The Motley Fool. I am Owain Bennallack, and I have with me Nate Weisshaar. Hi, Nate.
Nate: How are you?
Owain: I'm very well, thank you. Today we're going to talk about 2012, and we're going to look ahead to 2013.
Owain: Now, I think that both of these -- spooky, it's interesting you should say that, because of course the world is going to end apparently, on 21st December, so this could all be completely futile, according to the Mayans, that is. I think this is one of the most disreputable things you can do as an investor. You look back at 2012, and you go -- yeah, we saw all that coming; then you look forward to 2013, and you make a load of guesses. I think probably we would both say that investors should be not concentrating too much on calendar effects.
Nate: Yeah. I don't think the rollover from December to January doesn't often change the business prospects of a company.
Owain: Although perhaps with the fiscal cliff in the U.S., this year is the exception.
Nate: And the Mayan calendar.
Owain: And the Mayan calendar!
Nate: That could change everything.
Owain: Exactly, in which case we won't have to worry about it. So this year, the FTSE 100 is up 6.5%, not including dividends, which is not bad, but given all the drama in the market this year, I think it's quite interesting to see some of the other results: the S & P up 9%-a lot of people perhaps would say, fair enough; the U.S. has done a bit better. The French market's up 15%. The German market is up nearly 30%. I think, if you look at what people were saying at the end of 2011, and then look at those returns, if anything the fears that people had over the European meltdown were a reason to buy Europe.
Nate: In hindsight, that's the big takeaway, I think. The ECB's actions this year have, at least for the time being, calmed everyone's fears. They may rise up again, but it looks like they've done their job.
Owain: And the other big two fears that I identified, trying to go back to the start of the year, apart from the fact that I was getting a bit older and a bit tubbier around the waist, and I had to do more fitness; the other fears that seem to be kicking around were that the U.S. would go into recession, and that China would have some kind of a hard landing. I think we can say that the U.S., I'm going to say it hasn't got into recession. I think it did slow down a bit. China did slow down, I'll give that a half mark. It did slow down, but it wasn't a hard landing.
Nate: It definitely wasn't a hard landing, I think. We saw commodities sell off because demand in China did slow, but it hasn't ended. They're still growing, albeit less than everyone has come to be used to from them, but it does look like the stimulus that they've kicked in has done the job, similar to the ECB.
Owain: And the other thing, of course, in China is, we have this political transition that's now taken place, so potentially, they've got a freer hand to act now.
Nate: Theoretically, yeah. This transition was a big turning point, as far as, they didn't want any social disruption leading up to it, and now we'll see if the potential reforms that have been bandied about actually come about, or if the communist party is unwilling to take a more flexible stance, given the world's economic problems.
Owain: You mentioned stimulus. Something that has underpinned my, I think sometimes probably quite annoying bullishness on the Champion Shares Pro team here at The Motley Fool is the kind of stimulus that's just routinely being applied, and obviously this year in the U.S. we had further measures by the Fed. The U.K. has continued to keep interest rates low, and has carried on with its own kind of operations. Gilts are now down to 1.7% yield; they fell as low as 1.5% in the summer. The Fed has in fact even increased its operations recently. In the fact of this kind of flood of money, is there any way the market could crash?
Nate: There's always something that could cause the market to crash, the Mayan calendar being one of them, I suppose. But any major surprise will cause the market to react generally negatively.
Owain: And I guess the danger would be that, given that the banks around the world have done all these stimulus measures in a year that's turned out to be not too bad, they don't necessarily have much in the ammunition bucket, should things turn south.
Nate: Yeah, if we see some serious disruption in energy, energy prices sky rocket, that could cause a major economic slowdown, and the banks don't have a lot left to fight something like that.
Owain: OK, well before we look too much further at the future, let's just continue with 2012. Another big thing I though this year was the U.S. housing recovery, and the reason I think that's critical, even for U.K. investors, is because the U.S. housing market was really the epicentre of where all the chickens came home to roost. Leaving aside the impact on U.S. stocks in particular, it has to be a good thing if that market is at least bottoming.
Nate: I think you're absolutely right. If U.S. consumers have a little more confidence in their home prices, they may have enough confidence to start buying again. U.S. imports have been a trouble for companies in China, being the big pain that they're feeling, but plenty of U.K. companies export into the U.S., and so if you have a more confident U.S. consumer, it's going to help pretty much everybody in the world.
Owain: Yeah, and there's specific U.K. companies that have done well as well -- you're quite right. Of course, confidence has been battered a little bit in just the last month. We got through the election, with Obama being reelected, but then we have the fiscal cliff drama, which I get quite worried about, all these various names that keep getting trotted out now for these different things, because it seems like the media, and even perhaps some of the people in the market, have now so started thinking, after the last five years, in terms of political crisis: event, event, event. Anyway, they've called this one the fiscal cliff drama. This is the seasonal blockbuster, it's going to run up to the wire. I guess, by the time this podcast goes out, it could well be resolved, so we don't want to speculate on what will happen, because we'll look a bit silly. But in ten years' time, if they don't resolve anything, there maybe a short-term hiccup, there's a long-term U.S. debt problem that needs to be addressed, but whether it gets addressed by a particular tweak here or there this Christmas isn't going to make a difference, is it?
Nate: In the long run, I don't think so, but I think if the U.S. government can show that it has some will to co-operate, it will be significantly helpful to markets. The attention really is on the singular event. This event is representing what is essentially an inability by the U.S. government to keep its house in order.
Owain: So the theory would be that, if they can make some kind of compromise here, maybe they can tackle the multi-trillion-dollar long-term issue?
Nate: Exactly, and if they trip up on this, then there's no credibility for them taking on bigger issues.
Owain: That's a good point. So I thought we'd have a quick look, with our hindsight hats on -- we won't say whether we thought, well in fact we can, in one of these cases, I suspect, we will shortly reveal; there's a couple of shares, that's what I'm driving at here -- a couple of shares from 2012 that sort of, either did particularly well, or in some way summed up the year, or just you thought were generally interesting. If you mention one of yours first, and then I'll have a quick chat about one of mine. So what share did you alight on?
Nate: I was fortunate enough to select Hargreaves Lansdown before it went up to 62%, which is what it returned at this year.
Owain: A round of applause! There's a dividend as well, isn't there?
Nate: There's a very nice dividend. It was a little over 3.5%, I think, of the yield currently.
Owain: So that would be about 65% total return?
Nate: Yeah, and had we done this podcast a month ago, we would have had an extra 10%. The shares have come off a little bit.
Owain: But if we'd done it six months ago ... because it did go down, didn't it? It's interesting, because Hargreaves Lansdown obviously, for those who aren't aware, is sort of a platform for funds. You go in as a consumer, and you buy your funds through it, and traditionally they've rebated some of those, the fees charged by funds, back to consumers. There's a big fear because of the retail distribution review, that that model is threatened in a way that will damage Hargreaves Lansdown, I mean the model is definitely threatened. It's about to be extinct, the way of the dodo. It's interesting, because there doesn't seem to have been that much concrete information out there that's changed over the year, and yet confidence seemed to return to the shares in the latter half of the year.
Nate: I think a part of that was that Hargreaves reported strong new client growth, which had been, in addition to the RDR fears, their growth had slowed a little bit, and the market was a little skittish on that. But they showed that they've continued their long-term growth trend, and part of the complacency around RDR right now is that the FSA hasn't come out with strict guidelines yet.
Owain: Well, the FSA itself is going to be, this is on the extinction list, so perhaps nobody knows who's going to even make those guidelines up?
Nate: Yeah, it's really a big uncertainty right now. I think personally, looking at the shares right now, they're trading at a forward P/E of 24. I think that's a little rich, given the uncertainty that they're facing, but I still think the company's great, and I'm quite happy that we got in when we did.
Owain: I own Hargreaves Lansdown, as you know, and I eventually did trim my position a little bit around the time that we were thinking that they looked a bit expensive. I think it's one of those shares which you can really see a role for, over the next five to ten years. We as a consumer are kind of encouraged to take more control of our finances, but there are definitely some road bumps, including valuation perhaps along the way.
Nate: It's similar to the fiscal cliff. I think RDR will be meaningful, especially in the short term, but I think Hargreaves Lansdown has such a strong platform, it's the dominant player in the market, and its focus on customer service is a great selling point. So I think they're positioned well to do whatever needs to be done to win after RDR.
Owain: OK, well a share that I thought I'd pick to discuss, even though it's not a U.K. share, it is a share that I currently hold, I should declare; is Apple . The reason I pick Apple is not particularly because its behaviour kind of fitted the kind of political or economic developments over the year, but really because it's a share that you just could not get away from. I mean, it's like one of those sort of dot.com shares in the old days -- it's a share that's always driving the headlines. It started the year at about just over $400. It climbed above $700. It plunged down to $500 shortly after I bought them, and I think now, as I speak, it's about $517, but by tomorrow it could be plus or minus 10%, the way it's going. I mean, it's a really interesting company, I think, because, where you get that issue with, sometimes as investors we're told that we should invest in what we know. You could see that Apple was doing well -- a lot of people still love Apple products, and the shares don't look expensive, and yet that's only got you so far when it comes to investing, because the correlation of the price to the newsflow, not necessarily the retrospective kind of explanation of why the price moved, but in terms of what people expected, has really been, I think, as close to random as makes no difference.
Nate: The share price performance throughout the year has been, well the run up to $700 made some sense. They were putting out impressive numbers in sales in iPhones, the iPad, and their margins are improving, which is something you don't see a lot in the electronics.
Owain: That's the only thing I would say, though -- in the run up, it's true that the margins did get a little bit better, but still, the reason I say almost random is because most of what was true in June or July, when the shares were riding high, or August, or whenever it was that they peaked, was also true at the start of the year. They were a dominant player, they had incredible margins. They were growing at, take your pick -- 20 to 80%, depending on the quarter. So it's a lesson for investors, that they really have to think long-term, or in fact could you draw the lesson that for a share like Apple, you can't think long-term, and you should in fact trade it?
Nate: I suppose you could take the trading approach, but I think you do have to look at the long term. I mean, when you're talking about a company like Apple, it's discussed, as you said, every day; it's in every headline. So, if you're paying to attention to every one of those headlines, you're going to drive yourself crazy, and you're probably going to rack up a lot of transaction fees trading the shares, based on those.
Owain: You're looking at me very closely there! That is a risk, yes.
Nate: But I think, if you think more long-term, if you can block out the noise of these headlines, and look at, the shares are trading, they're currently close to a P/E of ten, and that's before you take into account the hundred billion in cash that the company has.
Owain: Yes, and versus their growth expectations, I meant the PEG ratio's well below one, and analysts historically have underestimated Apple growth by an enormous degree.
Nate: And even if, the big concern these days is that the iPhone is reaching saturation, so Apple's growth will slow. Its margins will shrink. But even then, they're not going to -- this is not too different than the Chinese fears earlier. China's growth may slow, but they're not going to disappear. Apple has one of the most recognisable brands in the world. It's loved by a very strong core. So I think a P/E of ten is pretty conservative for a company with a track record of pretty high-quality repeat business.
Owain: OK, well I think probably that's a good spot to finish our look at 2012, a kind of a reminder that maybe even though it's been dominated by headlines, and you could say that about a lot of years, but it really does feel that again it's been full of political events and political risk. Maybe, if you're an investor, a stock picker, you would go back to the company fundamentals, because ultimately that's what will add whatever, unless the Mayans were right.
OK Nate, well let's have a look now at 2013, and we obviously know exactly what's going to happen in 2013, and we're going to share it with all the listeners now for the benefit of any, I was going to say, Americans listening -- that's a terrible thing to say, from an American company. An irony-challenged listeners, obviously we do not know exactly what's going to happen in 2013 -- this piece of paper that I have next to me does not have next year's returns on it. The one thing that we do know about the markets is, they tend to surprise the most people, and something that does worry me slightly about 2013, and I say this as someone who tends to be quite optimistic, is that people seem to think that, once we get over this fiscal cliff business in the U.S., everything's set fair for a strong recovery. I don't know if that's necessarily reflected in the price, particularly in the U.K. market. Perhaps the U.S. market looks a bit more richly valued on a P/E basis. How do you see things shaping up, as we go into 2013?
Nate: I think that your point that the focus on headlines last year, and as we move into 2013, is a good one. I think that people are centring on this fiscal cliff, and they're losing the fact that there's a whole rest of the year that needs to be played out, once this is figured out, if it is. So we've already seen a slowdown in earnings growth in company results, which has, as you said, been more or less reflected in share prices. The U.K. market is not overly expensive right now. It's not a screaming bargain necessarily, but there are plenty of opportunities throughout the market. But I think that, if we get past the fiscal cliff, and people turn to the next issue, if that issue is large enough and negative enough, we could definitely see the market reconsider the current level -- a fairly optimistic view.
Owain: One thing that I think does underpin some of that optimism is sort of, the banks around the world are still being fairly accommodative; central banks, I should say, not the local banks, which famously aren't being accommodative, mainly because they're being told by the central banks not to lend money. Let's say, global manufacturing, perhaps didn't have the strongest second half of the year last year, but there are some signs, I think, that certainly, as I read it, that that's picking up a little bit. China is perhaps finding its feet again. It's a very, very long story to play out over decades in China, but at the moment, this kind of tailspin situation in China doesn't seem to have come to fruition. Where would you peg the prospects for kind of a global -- I don't want to say recovery, because I don't think we really slumped, but sort of, the global GDP, I guess. Do you see more of the same? Do you think maybe slightly to the upside, or possibly worse than people think?
Nate: Personally, I think 2013 will be, or most of 2013 will probably be similar to what we saw in 2012. A lot of the problems that were facing us aren't solved. Some of them are moving toward being solved, but it's a transition, and it will take time, and it could take a good portion of the year, but I think there are things lining up. The U.S. looks to be solidifying. The U.S. consumer has cleaned up its balance sheet a bit, and looks a little more confident. So I think, toward the latter half of the year, things could be looking good. When I look at the world, there's pockets here and there, and Europe, I think, will struggle. It will just continue to struggle -- there's too many problems that haven't been addressed, and not just in a stock market perspective, but on the ground. There's very high unemployment through most of the periphery.
Owain: Yeah, it's almost with Europe, that because the returns were so strong from the likes of the French market, and the DAX, which were up 15 and 30% roughly respectively last year, as we said. It's almost like the stock market now has assumed that there'll be some sort of middling through, but make no mistake -- those countries, you wonder whether things could get worse in Spain. Of course, they could, as anyone who knows Spanish history can report, but there's still tough times there. One area I'd like to quickly look at, before we look at a couple of companies that we think might be interesting, would be emerging markets, because 2011, I think was the year where everyone went in. When I say everyone, I mean you -- I don't mean you, sorry; I mean you, the listener, and when I say you, the listener, I don't mean you -- I mean all the other listeners, who all thought that it was obvious that emerging markets were the future. It was obvious that's where you should put your money, and then they duly had a terrible year; arguably they've had a terrible 18 months or so. It seems to me that there's some potential there for a bit of a bounce, if you were looking for an area where things might turn around.
Nate: Yeah, I think that's correct. The emerging markets' brush is a bit troublesome.
Owain: It's getting more and more unsatisfactory to describe Russia in the same breath as China or Brazil.
Nate: Exactly, and even what are now the true emerging markets of Africa, and other markets in south-east Asia, it was a bad year last year for the BRIC countries: the Russias, the Indias, China and Brazil. But there were countries around the world that would fall into the emerging market title that did pretty well. Columbia did very well. Mexico had a very strong year. Indonesia did pretty well; Malaysia, Thailand.
Owain: I guess one problem that investors have, though, is it's hard to access those markets.
Nate: It is.
Owain: That's probably why they did well in some ways, because you tend to get rewarded for difficulty in investing -- illiquidity anyway, I suppose.
Nate: Yes. I think everyone talks about globalisation, and the interconnection of the global economy. I think we're seeing that become more and more true. China's economy struggles when Europe struggles, because Europe is China's largest export market, so while Europe is still going to struggle, China is in the process of shifting its economy away from exports, and wants to develop more domestic demand.
Owain: I think perhaps that's why I would say that the emerging markets might have a decent year, though is, that's the economic underlying backdrop, but almost what changed this year was, they kind of de-rated. A lot of those companies carried on doing decent enough profits -- not all of them by any means, but people just got less enthusiastic about them, for one reason or another.
Nate: And that's exactly ... the thing that one of our colleagues made the argument to me last year, is that the emerging markets story has proved to be bunk. But then I said, first off it's not done, but I think that, as with everything in investing, it's what you pay for it. When people are expecting dramatic growth out of China, the prices for shares and companies go up. So if you're paying too much, and then growth slows, then expectations come down and those shares will come down.
Owain: Yeah, there's been some research done on that by Elroy Dimpson and his colleagues at U.K. Academics that say that the reason that emerging markets disappoint investors over the long term is entirely because they pay too much for the growth. The growth comes, but if you pay in excess for it, you don't benefit from that growth. So let's have a quick think about a couple of shares that we think might do well in 2013. Obviously we don't have a crystal ball, so take these with a pinch of salt, but we think probably over the longer term, I guess these would be companies that, the longer out we go, the more confident, I guess, we can be that some companies will prosper.
Nate: Yeah, I think that's a safe bet.
Owain: Which is your company that you've sort of selected for this?
Nate: Well, just to start, I wanted to point out that, of the 279 shares in the FTSE 350 that had positive returns year-to-date, we can call this almost the full year, but only 99 of those, so around a third of them had positive returns two years in a row. The inverse is also true. The stocks that underperform tend to outperform the following year. It's similar to your point with the emerging markets is, when everyone expects some degree, when everyone likes them, then it's probably not the best time to be jumping in.
Owain: So you've been holding your nose, and wading around in the dumpster, I take it?
Nate: Yeah, there's a few that popped up to me, and these aren't exactly the most exciting shares necessarily, but I think they're solid places for your money, and over the long term, will be solid investments. The first one that jumped out at me was BP . Obviously, the remnants of the Gulf disaster are still overhanging the shares a bit, but I think the way they extracted themselves from the Russian partnership, and got a nice chunk of cash for that, as well as a 20% stake in the Russian oil monopoly, a state-owned oil company, is setting them up very well for the future. It's an oil giant -- they may not be growing rapidly, but they're not going to disappear overnight.
Owain: Do you happen to know what the yield is on that? Because it has been recovering, hasn't it?
Nate: Yes, and I don't have it in my notes.
Owain: From memory, it's about 4.5%.
Nate: It's beating the market, I know that.
Owain: Yeah, and they were increasing it by sort of 20% of POPA, when they increased it.
Nate: And then my feeling is that, 2013 and on, we may see oil prices fluctuate, but oil's getting harder to find, and we're not finding a replacement rapidly enough. So I think BP's raison d'être is going to be beneficial to shareholders for longer.
Owain: Look at that -- a bit of French, there was me making my generalisations about Americans. The American we've got not only gets irony, he can speak French! OK, well I'll quickly mention some shares that I thought were interesting. I was tempted to pick U.K. banks. They've already had, so this perhaps works against your suggestion to dive in the dumpster, but they've had a pretty good year to date.
Nate: I'd say they're still in the dumpster.
Owain: They're still down there, in the wreckage. If we were an American podcast, I'd be very confident about U.S. banks, because the differences is that the U.S. has kind of cleared out the inventory, the worst of the problems, I shouldn't say -- it hasn't, not all the inventory, but the worst of the problems in its housing market, and I think the banks are awash with liquidity. If there's a huge disaster, something bad could happen, but I think at the moment they're probably set fair for decent returns. In the U.K., it's not quite so clear to me, because house prices still seem a little peaky. So I was tempted to talk about those banks, but in the end, I decided, almost like you, to be a bit more boring, and I thought, where's no-one really looking for anything? And my attention turned to the U.K. supermarkets: Tesco and Morrisons . Both shares are on a price-to-earnings ratio of about ten; the yield is about 4.3 to 4.5 -- I think it's a bit higher on Morrisons. They have problems, in terms of the U.K. consumer is not exactly a roaring party animal at the moment, and also they face problems like the Internet, which is curbing their high-end sales they used to get from flogging TVs and whatnot. But in terms of companies that nobody expects much out on, and you could imagine maybe the profits do a little bit better than people thought, maybe the price-to-earning multiple expands 25%, and those yields, you could easily see, I think, 15 to 20% there. Do you have any view on those supermarkets?
Nate: I think that, my personal favorite in the stable of U.K. supermarkets is Tesco, but I think they're stronger, mainly because they have a strong international presence. Some of it's struggling right now, and they're unwinding the U.S., because they couldn't pull that one off, but I think people aren't going to stop buying food. All of these grocers are feeling the pinch of the super-discounters: the Aldis, the Lidls. So it's a struggling industry, as you point out, not in favor. So it kind of strikes a chord with me, that the value investor in me, I think that the yields are nice. I'm a little worried about Morrisons' yield -- I don't know that they're guided, or better dividend coverage, so I'm not sure there's going to be all that much expansion on their dividend from where it is right now. But I would put Tesco in my basket, and it is -- I own Tesco.
Owain: Yes, I should say, I own Tesco as well. You know, you pay a price for certainty, and if you want to buy one of the great stories that's roaring around all over the world, this here's a great story, can be next year's basket case, and this year's basket case, which I think some people would say is U.K. retail. If you look at what Tesco was just taking, I think it was one pound in every seven from the U.K. consumer seven years ago -- I've said seven years ago, because of the seven pounds. When the economy takes the punch it's taken to the stomach, and this, I think, goes for all the supermarkets, that money, however hard they work, however well they know their consumers, you can't make up for that kind of body blow, when you're that geared to the economy.
Nate: Yep, and I will say that one counter-argument to my negative stance on Morrisons is that they are coming from further back, as far as, they don't have an online offering.
Owain: They're just introducing clothes now, aren't they, I seem to remember?
Nate: And their inventory management is at least a decade behind what you see at Tescos. So I think they have the lowest fruit to pick, so they could outperform just delivering on what everyone knows Tesco does. So I think there's an opportunity for outperformance on that aspect.
Owain: OK, well that is our look at 2013, so we haven't picked an sexy mining companies or strange little oil explorer -- you've picked a big oil explorer. No doubt, when we sit here next year, there'll be some crazy shares that did well, but I think we would say, ultimately the tenets of good stock picking will always serve you better than sort of speculatively punting, either on outlying small caps, or on outlying economic results. The year could surprise us.
Nate: I'm sure it will surprise us.
Owain: My dad always used to be able to forecast the weather. He revealed to me once that the best thing to do is to predict whatever it was yesterday will be true today, even in the U.K., and I think there is some truth to that in stock markets, and probably not read too many headlines. OK, thanks for that, Nate, and see you in 2013.
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The article A Look Back at 2012 originally appeared on Fool.com.Owain owns shares in Hargreaves Lansdown and Tesco. Nate owns shares in Tesco. The Motley Fool owns shares in Hargreaves Lansdown and Tesco. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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