Shareholders cheer a stellar 2016-17 financial year

Despite some last-minute jitters yesterday, sharemarket investors have been rewarded as the financial year ends.

Faithful equities investors have cleaned up during the financial year just ended.

Despite some last-minute jitters yesterday, Australian sharemarket investors have been handsomely rewarded as the financial year has drawn to a close, with a powerful lift of more than 9 per cent on the ASX 200 over the last 12 months.

The exceptional performance when added with dividends — worth at least 4 per cent — brings total returns for share investors to at least 14 per cent — a major consolation for those who have kept faith with the sharemarket in the face of widespread enthusiasm for residential property.

For those without direct sharemarket interests, the strong performance should also underpin a bumper year for superannuation — the average balanced fund should also be showing a gain of something in the order or 10 per cent, according to industry analysts at Chant West.

The returns are all the more dramatic when set against tepid economic growth and mixed levels of confidence among consumers and industry leaders. The market was driven broadly higher by better global conditions, a crucial improvement in profits among key Australian corporations and the surprise election of an aggressively pro-business Trump administration in the US in November.

GRAPHIC: ASX rollercoaster

In fact, it was the election of Donald Trump that put a rocket under sharemarkets around the world. The strongest stretch for stocks was in the weeks immediately following his victory.

The strong 12-month returns are also impressive because they came from across the board. In other words, they were not this time around carried by banks or miners.

In fact, the winning stocks in the last financial year were a decidedly mixed group, with a most unlikely contribution from sectors that might have been written off in the past. They include airlines (Qantas up 106 per cent), steelmakers (BlueScope up 107 per cent) and milk producers (A2 up 116 per cent)

Mining stocks had a volatile year but finished well. Rio Tinto, for example, is up 40 per cent. Bank stocks, led by Commonwealth Bank, generally finished higher too — although some lost ground in the six months to June, with Westpac just 4 per cent higher over the year. Other stalwarts that have regularly propped up the ASX also failed to fire this year: Coles owner Wesfarmers finished virtually unchanged, while former superstars such as Domino’s Pizza actually went backwards, with the pizza chain falling 22 per cent.

Though there had been fears throughout the year that a volatile dollar would create difficulties for the wider market, the currency was relatively steady on a trend basis, trading in a tight range around the US75c mark.

Valuations in the market remain in line with long-term averages, with the all-important price-to-earnings ratio sitting at about 15-16 times, while the dividend yield for the market is still running at above 4 per cent.

Bearish commentators and some high-profile fund managers have nonetheless expressed concern that the local market may be heading for a correction. They make the valid point that the ASX 200, at about 5750 points, is still far away from its high of 6828 reached in 2007, and earnings forecasts are softening in recent weeks.

Looking ahead

A pattern that may well accelerate in the year ahead is the steady shift away from stocks that had been bought primarily for yield (dividends).

As market watcher Rudi Filapek Vandyck of FN Arena has pointed out, rising bond yields pull investors away from stocks that have effectively acted as “proxy bonds”.

Among the stocks looking vulnerable to this swing in sentiment are A-REITS (property trusts), which have done so well in recent years. Market titan Westfield has recently suffered a profit downgrade, while Shopping Centres of Australia has suffered the indignity of being listed as a “short idea” by Credit Suisse.

David Walker of stocksinvalue.com.au also points to healthcare stocks — Healthscope and Ramsay — as among the vulnerable stocks that have run hard. He suggests the big utility stocks such as Transurban may also be facing headwinds.

Of course, brokers are always more comfortable in telling us what to avoid, as opposed to what we might make money from in the year ahead. The Weekend Australian has examined a range of broker reports and found just three stocks that have managed to convince several leading brokers to nominate them as a buy going into the 2017-2018 year.

Here they are:

ResMed: The Australian-based global medical equipment corporation has been a long-time favourite of local stock investors, though in recent years it has lost some support.

Opening the 2017 financial year at $10, analysts suggest this might be the year of its strong return, with several brokers liking its mix of opportunities.

Orora: The spin-off from Amcor is now the packaging company most favoured by brokers, with price targets suggesting the stock could lift 10-20 per cent from its $2.85 price today.

Orora rivals include its one-time parent company Amcor and Pact, the spin-off from the Pratt group.

Aristocrat Leisure: A company that specialises in gaming technology challenges the notion that a stock will not come out on top two years in a row.

Although it gained a stunning 60 per cent over the last year it remains a broker favourite for the year ahead, with estimates of a price rise up to 10 per cent from today’s $22.50.

For share investors, the takeaway from the last 12 months must surely be that shares can outperform residential property. But unlike property returns, which are highly variable between different cities, everyone in the stockmarket gets the same rewards. It’s a point that may become much more important in the year ahead.