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Your guide to shares in 2017 outlines what the experts expect from each of the nine sectors. Here we look at agriculture, property and the banks. Prospects for technology, healthcare and resource stocks are mixed, while among retail, infrastructure and energy companies, the outlook is more positive for the last two.
Agriculture
Many investors in agriculture could be forgiven for wondering whatever happened to the so-called dining boom.
The bewilderment is perhaps most acute for those who tipped cash into initial public offerings of some of the industry's biggest players in the past 12 months.The nation's biggest live cattle exporter, Wellard, became one of the year's worst floats, dropping to just 20¢ after issuing shares at $1.39. Australia's largest chicken producer Ingham's had a less dramatic year but failed to light up the boards. Its shares briefly traded above its $3.15 IPO price but have since drifted lower.
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Citigroup analyst Craig Woolford thinks Ingham's has a strong market position and is forecasting earnings per share growth of 16 per cent between fiscal 2016 and 2019. Woolford is advising clients to buy the stock and has set a $3.60 target price.
But conditions could improve for both companies in 2017.
And more broadly, forecasts for a record winter crop and bumper summer production is buoying the outlook for the agriculture sector. The gross value of farm production is expected to rise 6 per cent to hit $60 billion for the first time in 2016–17.
Morgans analyst Belinda Moore says grains handler GrainCorp will benefit as increased grain volumes flow through its storage and handling network.
"GrainCorp have had a bad few years but ABARES [Australian Bureau of Agricultural and Resource Economics and Sciences] are forecasting a record crop and that will be good for GrainCorp's business," Moore adds.
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She argues fortunes could also improve for Ingham's if it delivers on the numbers promised in its 2016 prospectus.
Investors have been cautious about backing a float offered by private equity firm TPG, which hasn't been able to completely shake off making plenty of cash floating Myer only to leave shareholders nursing deep losses.
"Everyone likes to dislike private equity floats but I think Ingham's has a fantastic management team and fantastic fundamentals and as they start to deliver on the numbers investors may take a look at it and say it's looking cheap," Moore says.
Elsewhere, the nation's biggest dairy processor Murray Goulburn will be looking to turn a corner in 2017 when former Carlton & United Breweries boss Ari Mervis takes on the chief executive role with an aim to repair deep wounds with its farmer suppliers.
![In Sydney, residential conversions and stock withdrawals for the metro rail project are pushing rents up.](/content/dam/images/g/r/p/o/h/n/image.imgtype.afrArticleInline.620x0.png/1483047411751.jpg)
Veteran agriculture investor and adviser David Williams believes now is the time to buy dairy properties.
"Dairy is where the value is in rural property on the back of the problems with world prices and Murray Goulburn at home," Williams says.
"If you are looking for value, you can't give dairy properties away at the moment and this is the time to buy."
Williams thinks one of the biggest themes for 2017 will be "a disaster year" for the nation's beef processors, which have been hurt by high prices and low stock.
"The major retailers and consumers will suffer the flow-on in high beef prices and the consumption of pork, chicken and salmon with continue to grow and fill the volume and price gap left by beef," he says.
Corporate activity could be in the mix for crop protection company Nufarm on the back of increasing consolidation globally.
The spectre of corporate activity also hangs over Bellamy's but rather for its dramatic share price plunge after it warned sales were well below expectations.
While analysts cut their "buy" recommendations on Bellamy's, Moore says there is the prospect of corporate activity given the dramatic share price plunge for the one-time market darling. in an ominous sign for investors, just before Christmas Bellamy's extended a trading suspension until January 13 to negotiate with suppliers.
Banking
The two words that will be at the front of bank investors' minds when they return to work in 2017 will be capital and dividends.
One of the initial tasks for the new year will be assessing a major announcement expected in January from the Basel Committee on Banking Supervision. It will attempt to solve the lack of consistency in the "risk weights" that global banks use to determine capital levels.
Analysts expect the package to be more benign than feared, and aren't expecting it to trigger dramatic new equity raisings globally given the fragility of banking systems in Europe. Nevertheless, the outlook for bank capital will remain in focus in 2017 as Basel's work is transposed locally by the Australian Prudential Regulation Authority (APRA).
APRA will spend much of the year consulting on the assessment of "unquestionably strong" banks, the standard set down by 2014's financial system inquiry. This will involve more than capital strength alone, as APRA chairman Wayne Byres has made clear. But given that the level of equity capital held by banks directly influences their return on equity and, ultimately, their dividend payouts, any softening of expectations about capitalisation levels could support bank share prices in the coming months.
That is an outcome that Macquarie analyst Victor German reckons is likely. After a year of wild share price oscillations, by mid-December the relative price earnings ratio of the banking sector was at an 8 per cent discount to its 10-year average.
German says there is "scope for this discount to unwind, given the shifting regulatory tone [on capital] both globally and domestically, potential upside on better cost management and the earnings headwinds being less material than previously anticipated". He expects each of the four major banks to at least sustain their dividends in 2017.
UBS agrees that imminent capital raisings by the major banks are now unlikely given APRA has stated that 2017 "will be a year of consultation" to determine bank strength. "However, pressure on dividends is likely to remain as APRA expects banks to continue to accumulate capital," UBS said. Dividend sustainability may well come down to APRA's timetables.
Bank investors will also enter the new year buoyed by the pricing power of the local oligopoly.
Net interest margins were under pressure for most of 2016 due to elevated funding costs in wholesale markets and higher costs for local deposits, while on the asset side of the balance sheet banks chose to reduce their interest income on some mortgages through aggressive discounting in order to maintain market share. But by the end of the year, deposit and mortgage competition was easing, leading several analysts to raise slightly their expectations for bank net interst margins, which flow directly through to earnings.
The big banks also lifted interest rates for property investors in December, which Deutsche Bank said was motivated by the desire to repair the profitability of their mortgage books and to widen the gap between investor and owner-occupier pricing.
Banks will also be supported in 2017 if their bad debts remain low, which analysts expect – so long as unemployment doesn't spike up. After all, buying bank shares is ultimately about making a call on the outlook of the Australian economy.
James Eyers
Property
Rising rates in the US and increasing bond yields will weigh on the listed property sector in 2017. At the same time, sell-offs across the sector may generate buying opportunities. And stronger property markets, especially Sydney's CBD office towers, will be favourable for landlords such as Mirvac and Dexus Property Group.
The ageing population will be another strong theme, making retirement players such as Aveo Group attractive.
Investors in listed property have become accustomed in recent years to outperformance. That theme was knocked askew in the second half of 2015, when bond yields finally began rising in anticipation of looming rate rises in the US.
Real estate investments trusts (REITs) correlate strongly with the bond yield curve. As bond prices fall, yields rise and property stocks become less attractive. At the same time rising commodity prices and the Trump rally pulled money out of property.
That pressure turned 2016 into a tale of two halves for Australian REITs. Total returns in the first half of calendar 2016 were 16.3 per cent from the key REIT index. As the new year approached, investors were looking at -3.9 per cent for the second half. The sector is trading on a dividend yield of 4.6 per cent.
In mid-December, the US Federal Reserve tightened monetary policy and flagged three more three interest rate rises in 2017. In response, Australian property stocks fell harder than the broader market.
Therein lies the dilemma for REIT investors heading into 2017: the sector's been good for them for so long but is it finally over?
Atchison Consulting's Ken Atchison is optimistic, albeit with a considerable dose of caution.
The sector has been oversold, he says, adding that the spread between REIT yields and bond yields has widened again.
That makes 2017 a buying opportunity.
"The fear of interest rate increases will emerge regularly in the market and you will get the sell-off," he says.
"It is definitely a market to buy on weakness. The REIT market will be very focused on what is going on in the bond market. There will be volatility and in that environment it offers attraction."
Atchison favours office landlords, particularly those such as Mirvac and Dexus exposed to the Sydney market where residential conversions and stock withdrawals for the metro rail project are pushing rents up.
He is less keen on pure-play residential developers as the housing marking peaks. Nor does he expect much growth from the retail landlords, such as Scentre Group, the owner of Westfield malls in Australia, and Vicinity Centres.
More appealing is Westfield Corporation, which controls malls in the US and Europe, In a capital-constrained world, the property trust is well placed to fund further development from its own balance sheet, Atchison adds.
Morningstar's Tony Sherlock is more wary of the REIT sector as the low-interest rate tailwind of the last two years dissipates.
"The upside tends to be gradual, the downside tend to be fast. Lower leverage is the way to go," he says.
Within the sector, Sherlock singles out retirement living operators such as Aveo. They have Australia's ageing demographic on their side.
You guide to shares 2017:
Part 1: Agriculture, property and bank