The markets have been tough to predict so far in 2017. Even the brightest minds in the business were wrong about the impact of major political events, like the election of Donald Trump and Britain’s exit from the European Union.

Joined by host Alex Whitlock and co-host Phillip Tarrant, BetaShares chief economist, David Bassanese, discusses how to best navigate the markets in 2017 amid ongoing uncertainty, without compromising the security of a wealth and retirement portfolio.

Tune in to find out:

• Which market black spots investors should avoid

• Where you should look for long-term gains

• The best information and tips for investment success

See full transcript below: 

Alex Whitlock: Hi, welcome to Nest Egg. My name's Alex Whitlock, I'm your host. Joining me today I've got my friend and colleague Phil Tarrant. Some of you may have heard Phil speak before. Phil hosts a podcast called the Smart Property Investment Show. Phil talks quite extensively about building wealth through property investment. Phil, welcome.

Phil Tarrant: Thanks for having me.

Alex Whitlock: Good to have you here. Joining us today I've got David Bassanese. David is the chief economist for BetaShares. I thought it would be good to bring David along to have a chat to our listeners. As we enter a new year there are major things happening globally, I guess as there always are, but I think currently, with the revolutionary situation in the US, with Mr. Donald Trump taking office. Looking back over 2016 you've got the turmoil, and the surprise, and the shock around Brexit, so I thought having a chat to David would be quite good timely now. Have a look at what we can expect in 2017. David, welcome.

David Bassanese: Thanks very much, Alex. Great to be here.

Alex Whitlock: So, David, you're the chief economist with BetaShares. If you just give us a quick overview of what BetaShares is and what you do there.

David Bassanese: Yeah, well BetaSheras is a fund manager, first and foremost. It has about 30 funds, a lot of funds, but basically it's in the exchange traded funds business, so all of our funds are available directly through the ASX, so we're in the rapidly growing ETF sector. Yeah, we have funds that give you access to Australian equities, international equities. We're not active managers in the sense, it's more about providing products that allow investors the opportunity to invest depending on their preferences. So if they like commodities, if they like Australian equities, if they like different sectors, we have a fund that will give them that exposure. My job at BetaShares as chief economist is really to ... Of the various funds out there, and just general investment information, provide insight into where the markets are going, what particular investments look more attractive at the moment, so that sort of investment advice. We talk directly to investors, and also financial planning groups. Yeah, so th
at's really my role.

Alex Whitlock: Excellent. Before we get started, for me, I don't know about you, Phil, but it feels like this is a real time of flux. No one would have foreseen Donald Trump coming into office in the States. In many ways capital markets seem to have not performed the way that maybe was expected prior to his success. Markets possibly haven't performed the way that they were expected post-Brexit. Is this an unusual time, or is this just the new normal?

David Bassanese: Who would have thought? The received wisdom just before the US election was that Donald Trump's unlikely to win, and if he did win the markets would slump, you'd have the Trump slump. What happened was he actually did win and the markets rallied.

Alex Whitlock: A bull run.

David Bassanese: So it's completely contrary to all market expectations and essentially what happened, and I saw it happen in real time because I was watching his victory speech, and all of a sudden from the quite bellicose, hot-tempered candidate he became quite reasonable and moderate, and talked about rebuilding America, talked about fiscal stimulus and the future's markets turned on a dime during the speech, and the markets have been more or less rallying ever since. Basically what's happened is the markets are now focusing on, rightly or wrongly we'll wait and see, but they're focusing on fiscal stimulus and more so than the uncertainty of Donald Trump. He's probably going to get tax cuts through the US Congress. Not only did he win, but the Republicans won control of both the House of Representatives and the Senate. There are good prospects of tax cuts, fiscal spending in areas like infrastructure and more defence, which the markets have latched on to. There's a bully sentiment that it's emerging around
this. Now, how that plays out we can talk about, but that's certainly the sentiment over the last few months.

Alex Whitlock: How quickly, and markets are often sentiment driven, but how quickly do you think sentiment can change around ... Because at the moment we run the crest of the wave with Donald Trump, and as you say he has toned things down and he's making some very positive noises, and it sounds like he may be more savvy in terms of understanding the economy that maybe he first indicated, but do you think things could change quickly, and if so, what do you think those things may be?

David Bassanese: We've basically had the Christmas rally in both Australia and the US. Now, one of the issues ... The Christmas rally tends to happen because a lot of professional investors, so the argument goes, that a lot of professional investors go away on holidays and, generally, more retail oriented investors tend to be net buyers of the market, so the markets tend to be firmer, and so when the professional fund managers come back from holidays they might reassess things and start to sell. That's maybe one near term risk is that the post-Trump euphoria does lead to a bit of a correction, at least in the short run.

What's also happening in the US is that the economy is looking okay. Earnings growth has started to pick up in the US. Interest rates are likely to rise in the US. The Federal Reserve has raised rates in December and is talking about raising rates three times this year, but that's on the back of an improving economy. Again, another issue is OPEC having agreed to production cuts as listed at oil prices, which is allowing US oil producers back into the market as well, so that's another positive in terms of US economic activity that the oil sector there is being revised. To my mind the valuations of the market are higher than average and it's crucially dependent that the expectations of positive earnings growth in the US come through, and we are seeing that but it needs to be sustained.

Alex Whitlock: So most of our audience are ... The remit of Nest Egg is really about building long-term wealth, rather than necessarily short-term gains, but with that in mind, looking at 2017, can you just give me a little bit of an overview, or maybe some of my listeners, a bit of an overview of where you think ... In terms of some of the longer term gains, what sectors would you be recommending to look at?

David Bassanese: I guess one issue is that bond yields have been very low for a long time. They've rallied over the past few years in so called bond proxies, areas of the equity market that offer relatively high dividends, and relatively stable dividends, so the area is listed property, telecommunications, utilities. They're now under pressure because bond yields are rising. You've got Donald Trump with fiscal stimulus, you've got the US Federal Reserve raising rates. The valuations, they probably need to come back somewhat, so that's one area that I think is probably going to maybe not do so well at the moment. By contrast, financials are ... The two big sectors of our market are financials and resources, and the good news is that they look pretty well placed at the moment.

Alex Whitlock: The banks are going absolute gangbuster at the moment, aren't they?

David Bassanese: Yeah, because one of the things that happening is investors are getting out of the bond proxies. Sorry to use a jargonistic term, but the safe, defensive yield place and getting back into financials, because the dividend yields are looking okay and the financials, basically, are the banks I'm talking about in particular, were kind of left behind during the rally over the last year, or so, because of the concerns about capital raising. I think those concerns are now priced into financial evaluations. Valuations of the banks, for example, is less than what they have tended to be in the last few years, so relative valuations look okay there.

The other thing is the resource's sector. Anyone who's looked at our market knows that that's gone gangbusters over the past year as well, and what happened there is China, who has been expected to cut back on steel production and transition its economy toward things like services and consumer spending, has had to fall back on pump priming its housing sector, pump priming infrastructure. And steel demand in China had fallen for a couple of years, actually picked up a little bit last year. At the same time they've been cutting back their own iron ore production, which is an input into steel production, because it's very high cost and it's very highly polluting, so that's lead to a pickup in iron ore imports.

Alex Whitlock: So just in terms of resources, as sub-groups within resources, what do they fall into? You talking nickel, copper, iron? What are the different sort of areas within resources?

David Bassanese: Basically you've got the industrial metals and you've got the bulk materials, as in iron ore and coal, and you've got, obviously, the gold producers. I guess the industrial metals, and the bulk materials areas, have done well, and so as I was just saying, within terms of China, the iron ore prices have gone up over the past year defying a lot of expectations, so the iron ore producers BHP, Rio, Fortescue have done very well. They still look okay because most people expect iron ore prices to come back this year somewhat, but the talk of very low prices has gone out the window a bit, so at the moment, even if prices come back a little bit, there's still scope for earnings upgrades in the resource's sector. You may find the resource's sector doing well, provided China keeps on keeping on and doesn't fall in a hole, that looks good.

In terms of gold producers, gold will be under pressure this year because the US dollar's likely to rise on the back of high US interest rates. If there's a bully sentiment in equity markets it's not going to favour gold, at least over the short run, but gold does have an advantage in being a source of diversification in your portfolio because one thing we know is that if things go bad it's a flight to quality into things like gold. It's a handy diversification and you can do that by buying a gold fund that tracks gold prices directly, or buying a gold producer, or there are some funds where you can buy a broad access to a whole collection of gold producers, so that's another option as well.

Alex Whitlock: Okay. You're not a shares man, are you Phil? You're a property man.

Phil Tarrant: I'm a bit of both, actually.

Alex Whitlock: I won't mention the name of the fund but I know you’ve got a great performing retirement fund from memory.

Phil Tarrant: Yeah. I find this really intriguing because to me it's very much a message around diversification. I look at 2017, I look at opportunities for investors. I try and keep myself educated. I use a whole bunch of different mediums to do that, but when I look at equity markets, or bond markets, and I position that along the property markets, there's so much noise out there. So we're talking about these big, macro-economic forces which are going to shape the way in which businesses may perform in Australia. We have the Australian economy and it's gone through a period of flux last year. Now it feels like we got some stability in terms of our parliamentarians down in Canberra, and focus in terms of creating a national economy, which isn't resources focused, but more ideas, technology oriented.

For me as an investor, whether it's property, or equities, or whatever, I'm just thinking what sort of tools, or what type of tactics would you give our listeners to help them crystallise what they want to do for this year and understand where they should be placing, or emphasising, their time and efforts to understand where to invest, and just really synthesise or filter out all the noise and actually get going and doing something, because investors sit around and talk about investing a lot, but sometimes they don't actually get to doing something and how do you get those steps forward to actually do something this year?

David Bassanese: One thing I'd suggest is that investors first and foremost focus on asset allocation in terms of big picture. A lot of investors may focus on the equity market a lot, and so they're focusing on which individual stocks to buy and they find that maybe they've got a 100% of their wealth in equities, which if you're in retirement, or near retirement, is probably a very high risk profile, and so you might want to think about "What percent of my funds is actually in the equities market?" to start with. And maybe if it's too much look at things like fixed income bond type products, and again, they're bond funds unlisted, or listed, you can buy them directly on the ASX these days, which will give you yield and they're somewhat less volatile. If markets do go pear-shaped bond funds tend to do well because central banks tend to want to cut interest rates, which helps bond funds.

So first and foremost focus on that asset allocation, and then within the equity market, looking at individual stocks is really the end game. First you want to get your asset allocation right, and then within the equity market, "Do I want to have 25 stocks and juggle my expense to all those stocks?" Because what tends to happen is some of those stocks will do badly and people have a very strong reluctance to want to sell them, so they tend to fall a lot. So one, again, is you can buy a fund, a diversified Australian equity fund that will give you that exposure to the market. Say you put half your money in a diversified fund, and therefore you've got half your money where you can pick individual stocks. So basically get your asset allocation right and then simplify your investment processes somewhat so that you're not overly focused on the minutia and missing the big picture, if you know what I mean. That's probably what I would be saying at the moment.

Phil Tarrant: As an investor in 2017, where should I be channeling my efforts in terms of increasing my education? What tools is there to help me, number one, understand how I'm going to shape the diversification of my asset classes, but is there any particular advisers I need to speak to? Is there any particular shows I need to watch? Is there any particular books I need to read? What are these things? What's the tools for me?

David Bassanese: Keep reading our Nest Egg. But seriously, look, there's a lot of information out there, and you're right. There's probably sometimes too much information, so you really got to focus. I think focus on the big picture first and keep abreast of the big picture ideas before you start worrying about individual stocks would be my first ... Publications like Nest Egg, the Financial Review, are all good. And the other thing I would ... Again, in terms of managed funds ...

A lot of investors invest directly into share market, for example, and this is why I get back to investing in individual stocks, but be aware that there are a lot of managed funds now, indexed funds or funds that give you different exposure to different markets that you can buy directly on the stock exchange as well. So if you're not familiar with exchange traded funds as a source of diversification, get educated on that because, again, that will help you get the building blocks in place to compliment your stock picking. People love to pick stocks, which is fantastic, and some people do very well at it, but I think you also have to have the building blocks in place as well.

Alex Whitlock: I think people get very intimidated by investing. Certainly I do, it's ... Saving is easy. I put my money in the bank and I can check on the interest rates that I'm going to get, from 0.5% to maybe 4%, depending on what kind of savings facility I go to. Investing's frightening, I think, for most people. I've invested in property for many, many years, I've done a fair amount of investing, I bought stocks and shares, I still feel intimidated by it. People who don't necessarily see themselves investors, but they want to build wealth, what can they do to ... Maybe de-mystify some of the technical things around investment. Managed funds worked because you are bringing in a fund manager, you work out where your appetite for risk and you'll have a fund manager who will manage that particular portfolio for you, but what can investors do to bring up the courage to put their money into something which may give them better return, because there's a fear of losing your ... Investments go up and down, so wh
at can investors do to actually get motivated and get started?

David Bassanese: Really, if you do your research, don't be frightened to get ... Again, I go back to asset allocation. If you're near retirement, people talk about, "Ah, my financial planner, you know, burned me during the GFC because my s- my portfolio went down 50%." But if you're in a situation where you were worried about it, a 50% decline in your portfolio because you're living off it, your asset allocation was wrong. You want to get an asset allocation such that the volatility in the markets, which you can never avoid, you can't get return without risk, that you're comfortable with that volatility. Again, I go back to getting the asset allocation right, making sure your exposure to the volatile equity market is not so much that you'll be-

Alex Whitlock: Tell me a little bit about what a fund manager will do for everyone to invest. Let's just give us a little bit of an insight in any particular area to invest. What is it that they will do and how they go about doing their job?

David Bassanese: If you have an equity fund manager, they are charged with picking the best stocks and so they're like-

Alex Whitlock: Maybe like small caps, or technology, or particular.

David Bassanese: Exactly, and they look at evaluations at the different companies, they go and talk to company management. You're hiring a professional to pick the stocks for you and good managers will outperform the market.

Alex Whitlock: To frame that, by outperforming the market, I know the market might flat you, but what should you be looking for in terms of above market? How do you measure the market and what you should be expecting from your fund manager?

David Bassanese: Obviously their return performance, but also how much risk they're taking, because you can't outperform the market in certain years, you'll be taking a lot of risk, and so you've got to look at if they're investing in a lot of small cap, highly speculative stocks, which you get right sometimes and get wrong other times. And to the extent, they have a systematic process, it's not personality, highly discretionary type driven, is something to look at. Again, in terms of fund managers, there are also funds that ...

Again, but if you invest in a managed fund that gives you exposure to equities, that's fantastic, they may outperform the market, but if they're always fully invested in the market and the market goes down, they're going to go down as well. You can't blame them for that because their mandate is to be invested in the market. It's really up to you to decide, "Well, am I happy with that degree of equity exposure?" A fund manager managing equities will promise over time to give you a better return than you would otherwise get if you're just directly investing in a passive fund, for example. I guess the other caution with managed funds is really to avoid the temptation to buy something that's just been the strongest of late, to buy momentum, because there are a lot of good managed funds out there, but some of them will do well for a certain period of time and then just went-

Alex Whitlock: So management's gone past performance. Fund manager will say, "We achieved 14%, you know, in the previous year." How do you ... We'll have to wind out fairly soon, but a couple of questions enclosing. What's your advice to investors? When a fund starts to either flatline, or go down, when do investors know when to cut their losses and when do they know when to buckle up, and how do they get the information to decide, to make an informed decision?

David Bassanese: That's a good question. Why is it going down? Is it-

Alex Whitlock: Because I've bought fund years ago, and not for a while, and I know what it feels like. You invest in a fund, the sun is shining, it's going up, and then the next thing, things are changed. You get nervous as an investor, so how do you decide how to stay the ... And I've sold funds that have then gone straight back up and felt sick, but ...

David Bassanese: If the fund is going down in the period when the overall market is going down it's really been caught up by the market, so in that sense you've got to say, "Well, maybe it's not something specific with the fund managers that they happen to be ... You know, it's a bad time for the market." Now, if it's going down in a period where the market's going up then you go ... Extra concerns.

Alex Whitlock: So if you then contrast to the general market trends, that's time to start looking the fund you're in, and the manager you're with, and maybe cut your losses.

David Bassanese: Again, the other thing to look for is if you've got some star stock pickers in that fund and all of a sudden they decide to leave, and you get some management changes that would give you cause to change to as well, so it really depends on the market environment. It's hard to have a rule and say if the funds down 10% I get out. It really just depends on the circumstances.

Alex Whitlock: Yeah, absolutely. That's good advice, because if the market's going down, your funds going down with the market, then ...

Phil Tarrant: The questions around, and this is the genesis of Nest Egg, is about creating long-term wealth.

Alex Whitlock: Yes, it is. Yeah

Phil Tarrant: And whether choose to do that within a self-managed super fund, or you're a self-directed investor and you invest outside [inaudible 00:20:11], or you do both. This whole context of building long-term wealth, it's critical for building a nice retirement.

Alex Whitlock: Yeah, it's about sustainability, when you no longer have to work, or you can pick and choose when you work.

Phil Tarrant: For me it's about when do you make these decisions, how involved you need to be in asset allocation, how involved do you need to be in insuring that the decisions you've made, or the investments you made, are tracking in the right way. The challenge I have as an investor is how much time do I need to place in managing my long-term wealth creation, and there's no hard and fast rule. Some people are obsessed by it, and they're obsessed by it because it's a hobby.

Alex Whitlock: This is when people ... You've got your whole financial planning industry of varying shapes and kinds. You've got your absolute independents, you've got your-

Phil Tarrant: So you can outsource the management if you want.

Alex Whitlock: There's different layers. I can pick my own stocks, I want to be responsible for my own destiny, and I'll live and fall by my decisions. Have [inaudible 00:21:04] is by the buy. I could be absolutely time poor, in which case I maybe have a planner who will then spends his time talking to fund managers and we'll know which ... I think it's a matter of working out what degree of advice you feel you need and what amount of time you've got to research the market. Or if you want to gamble on the stock market, it's there and accessible for everybody.

Phil Tarrant: I know you wrap up, Alex, but for our listeners, in terms of, say, the domestic marketplace, if I was looking to shape asset allocations for 2017 within a context of a diversified portfolio, what are those key things, those two or three key metrics that I want to keep an eye on in 2017 domestically, but also globally, which might shape the way in which I choose to invest, or choose to allocate my money?

David Bassanese: I guess the risk factors this year ... I think the equity markets had an okay year last year at the end of the day. The earnings growth in the US, and globally, and in Australia, is starting to pick up. I think that market is shaping up to have another okay year, so I wouldn't be overly cautious at the moment, I'd go into the year somewhat optimistically. Having said that, the things to look for are any tensions with Donald Trump, in terms of trade tensions with China, for example. In Australia, keep a watchful eye on China, because China's still stimulating its economy, keeping steel demand high, which will keep iron ore prices up and help the resource's sector.

The other thing to look at is the economy's doing okay, but inflation's still quite low and the Reserve Bank may cut interest rates this year. There's at least a 50/50 chance you get another rate cut here, which will help the banking sector and help the economy as well. Those are the three things. Trump, China, RBA, but bottom line is signs that the economies are doing okay, and earnings growth is still coming through, is going to support the equity market.

Alex Whitlock: Just as a close, David. What would you steer clear of in 2017 in terms of sectors? What would you warn investors to keep a very close eye on?

David Bassanese: The general theme would be rising interest rates ... Rising bond yields, I should say, so long-term interest rates and a stronger US dollar, so that would suggest the defensive yield areas, like listed property, I think will be under pressure and areas like gold. So that would be two ones to be wary about under that scenario.

Alex Whitlock: Fantastic! David, it's been a pleasure chatting to you. I'd like to get you back another time, it's been ...

David Bassanese: No worries. Thank you, Alex.

Alex Whitlock: ... very enlightening. Thanks very much, Phil. Always a pleasure.

Phil Tarrant: Yeah, thank you. Thanks for having me.

Alex Whitlock: It's great catching up with David Bassanese from BetaShares. Don't forget to check us out on nestegg.com.au. The site is packed full of news, information, insights that are going to help you build wealth, create wealth and manage your wealth better. You can also connect with us on all the usual social media and if you like to get in contact, if you got any questions, please don't hesitate to contact me, Alex Whitlock, and you can reach me at This email address is being protected from spambots. You need JavaScript enabled to view it.. Thanks.