Stock pickers set to win in year ahead

Low interest rates and low economic growth will test returns for sharemarket investors, putting the focus on stocks bought and held, fund managers say, forcing investors to change their strategies if they wish to generate returns.

"Whatever you've been doing isn't going to work; it hasn't been working for some time," Australian Unity chief investment officer David Bryant said.

Prolonged low commodity prices and demand from China, as well as low interest rates and economic growth depressing company earnings, would mean 2016 would not be "an outstanding year" for growth in the S&P/ASX 200, he said.

"Therefore, we can expect Australian equity returns to be muted."

One of the harbingers of the year ahead will be on Friday night, when the US releases its December jobs figures report.

Economists expect the US to have added about 200,000 non-farm payroll jobs. If the number is higher, such as 250,000, the pressure will be on the US Federal Reserve to lift rates again.

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Other US data releases this week include international trade numbers, factory orders and services and manufacturing index updates.

In Australia, data releases include consumer sentiment on Tuesday, trade numbers and building approvals on Thursday, and retail trade on Friday.     

Mr Bryant is calling another bad year for resources stocks after an annus horribilis for the big miners after the slide in iron ore and oil prices.

"There's just no reason to think you'll get anything from resources this year," Mr Bryant said. 

The banks were also in for another tough year, he said.

"The combination of additional capital controls, APRA wanting to limit housing lending, bad debts at record lows, interest rates at record lows, it's really hard to see how it's going to grow much in the next year."

Outside of those two sectors, another quarter of the market was under pressure, he said.

Another 30 per cent to 35 per cent would maintain dividends but record lacklustre earnings growth.

"That leaves about 35 per cent of the market to work with to generate a return."

That meant 2016 would be a market for stock pickers, not indexing, he said. 

"Your strategy for the market should be to move into and out of the market as it moves around," he said. 

"At 4900, it's probably a pretty easy investment to make; if it goes up 10 per cent, that's probably an investment you want to take off the table and be comfortable with everything in between."

The major investment banks have trimmed their year-end, 2016 targets for the index. Citi has a target of 5900, while Goldman Sachs tips the index to hit 5600 by December. 

An increase to 5600 would be a 5.6 per cent rise on 2015's closing level at 5296 points. 

However, Credit Suisse Private Banking and Wealth Management chief investment officer for Australia David McDonald expected the Australian market to outperform in 2016 and miners "are a large part of that".

"Certainly, if you're willing to take a longer view, there is compelling value in some of the resources stocks," he said. 

Mr McDonald did not expect a big lift in commodity prices but said they were closer to stabilising. 

Investors would still be drawn to yield, he said, as the high payout ratios of the top companies trumped yields on other investments, including bank deposits with interest rates at record lows. 

For stock picking, the themes that defined 2015, which emerged from Australia's economic transition from mining to services, would continue.

These included tourism, education and agriculture, Prime Value Asset Management joint chief investment officer S. T. Wong said.

"There will be also certain sectors which are looking expensive, such as healthcare . . . arguably it's looking expensive but the flipside is it could also be said that growth is really hard to find, so what's expensive could continue to be expensive for a period of time."

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