Your guide to shares in 2017 outlines what the experts expect from each of the nine sectors. Here we look at retail, infrastructure, energy. Prospects for technology, healthcare and resources companies are mixed, while among agriculture, bank stocks and property, the outlook is more positive for the first two.
Retail
Veteran retailer Solomon Lew wasn't exaggerating in December when he bemoaned the state of Australian retail, saying the last five years had been "as difficult as I have ever encountered". As 2016 drew to a close, real retail sales growth barely kept pace with population growth, falling to levels not seen since the global financial crisis as weak wage and employment growth took a toll on disposable incomes, prompting consumers to pull in their belts.
The bad news for investors is that retail spending is expected to remain subdued in 2017 before ticking up in fiscal 2017-18.
Deloitte Access Economics partner David Rumbens expects real (inflation-adjusted) retail sales to grow just 1.3 per cent in fiscal 2016-17, below the five-year average of 2.8 per cent, before recovering to 3.0 per cent in 2017-18.
Citigroup expects 4 to 5 per cent growth in nominal retail sales in calendar 2017, ahead of 2016 but below the 20-year average of 5.3 per cent. Citigroup's head of research, Craig Woolford, warns that retail sales growth could slow if house prices stop rising and consumers are more reluctant to dip into their savings as much as in 2016.
The good news is that pockets of above-average spending and self-help initiatives will create winners and losers.
Citigroup's top pick is Myer, which is starting to return to favour as chief executive Richard Umbers' New Myer strategy gains traction. Myer shares have risen 38 per cent since the department store chain raised $221 million at 94¢ a share in September 2015 to fund the turnaround strategy, and Citigroup sees further gains as Myer refurbishes its best stores, tweaks its product range and improves its digital offer to better compete with online rivals.
"We expect to see better operating margins and positive sales trends even with the sluggish [consumer spending] backdrop," Woolford says.
Citigroup is less optimistic about Harvey Norman, pointing to early signs of a slowdown in housing-related categories, and says the outlook for Woolworths, Wesfarmers and Metcash will depend on whether inflation returns to the food sector.
"We have seen low food price inflation for the last 18 months but some of the predictors or factors that drive food inflation like soft commodity prices are starting to suggest we might see more food inflation," Woolford adds.
UBS analyst Ben Gilbert believes the outlook for food retailers will depend on whether intense price competition over the last 18 months escalates into a full-blown price war, in which case margins will come under pressure across the board.
Gilbert has a "sell" recommendation on Woolworths even though he expects the retailer to close the same-store sales growth gap with Coles, a "sell" on Metcash and is "neutral" on Wesfarmers, citing the ongoing growth of Aldi.
"Competitive intensity will remain high and there's a risk around discounting and lower growth in fresh [foods] as Aldi ramps up its offer," Gilbert says.
UBS's top retail pick is JB Hi-Fi (which will gain market share and reap synergy benefits from the $870 million acquisition of The Good Guys) and Harvey Norman (which should benefit from housing market tailwinds).
While there is a risk that house price growth will slow, Gilbert expects near-record housing approvals and strong renovation and remodelling activity to underpin a $300 million increase in housing-related retail spending this year.
He also has a "buy" on Super Retail Group, which is enjoying strong sales in sporting goods and is fixing problems in outdoor leisure, while auto accessories will benefit from the demise of Woolworths' Masters.
"They're starting to get the business back on track," he adds.
Sue Mitchell
Infrastructure
It's tricky making infrastructure stock predictions for 2017. After soaring early in 2016, stocks like tollroad group Transurban and Sydney Airport have sunk in the last few months amid rising global bond yields and rallying stock markets, prompting investors to move money into riskier assets.
Analysts, however, question whether people are pulling out of infrastructure stocks too soon, given the global economy remains volatile and Australia's economy is contracting.
"The recent rotation [out of infrastructure and into cyclical stocks] has been a bit too savage," says RBC Capital Markets analyst Paul Johnston. "My view is that people are getting ahead of themselves."
Australian infrastructure stocks have been weaker than their peers in the US, Canada and Europe, partially because they rose further faster but also because they tend to lose investors when funds track market indices which are dominated by financial and resources companies, Johnston adds.
Both Transurban and Sydney Airport are well-run companies with double-digit growth in dividends and cash flow. Transurban's future growth will depend on its ability to encourage more cars and trucks to use its tollroads so it can keep increasing revenue from the toll fares.
But Morgan Stanley analyst Rob Koh cautions that the rising popularity of ride-sharing could hurt income from Transurban's US tollroads – because cars with three or more passengers pay no tolls on some roads.
Transurban chief executive Scott Charlton continues to be an active dealmaker, having proven he can successfully negotiate with state governments to win new projects, including upgrading Brisbane's Logan and Gateway Extension motorways.
Transurban investors are waiting for the Victorian government to give the company the final sign off on Melbourne's $5.5 billion Western Distributor project, which involves building twin tunnels under the city as well as a new bridge, and a potential sale of concessions in NSW to operate Sydney's new WestConnex motorway.
Sydney Airport's profits have been underpinned by rising numbers of international and domestic travellers, and the airport is expected to benefit from increased flights from China after the Australian and Chinese governments scrapped air capacity restrictions due to its "gateway status" for business and tourism, says Citigroup analyst Anthony Moulder.
The airport's big task in 2017 will be deciding whether to take up an option to develop a second Sydney airport at Badgerys Creek.
Rail infrastructure group Aurizon will face shake ups after former Rio Tinto executive Andrew Harding replaced Lance Hockridge as CEO in early December. Although rebounding coal prices helped boost Aurizon's share price towards the end of 2016, Harding still faces the long-term challenge of diversifying the company away from commodities.
RBC's Johnston says Aurizon could move into ports or logistics and become a fully-integrated transport company – or it could get rid of its freight business (which is under review) and focus on slashing costs in its core rail haulage and networks business.
Jenny Wiggins
Energy
After another hard struggle through 2016, the scene is set for brighter prospects for oil and gas players in 2017.
OPEC has set the scene for a firming crude oil price with its deal to rein in production, which propelled Brent crude prices comfortably above the $US50 a barrel mark.
RBC Capital Markets energy analyst Ben Wilson says investors can start looking at oil and gas stocks with renewed confidence again, particularly early in the year before clarity emerges on how strictly the new output targets are being complied with.
Over the longer term it is a trickier call on prices, with Fitch Ratings, for example, forecasting oil may "flatline" next year before gradually moving higher only in 2018. But while Fitch assumes Brent crude will average only $US45 a barrel in 2017, Bernstein Research is expecting $US60.
Internally, companies are doing what they can to lick their organisations into shape, with major restructurings by both Origin Energy and Santos, the local producers worst hit by the oil price plunge.
Origin is working towards an initial public offer (IPO) of its conventional oil and gas business, while Santos is hiving off its second-tier ventures into a separate division which could also herald asset sales. Global oil majors also continue to streamline portfolios.
Higher oil prices will clearly be supportive for the local larger-cap energy players which are increasingly LNG-focused, including Origin Energy now as well as Woodside Petroleum, Santos and Oil Search.
Contrarian value investor Allan Gray counts Woodside Petroleum and Origin Energy among its top 10 holdings, as well as regulated utilities player AusNet Services.
RBC's Wilson also likes Origin, but prefers Papua New Guinea-focused Oil Search to its peers, given favourable prospects for LNG expansion and the improving macro environment.
"Now investors are looking for alpha wherever they can, these longer-dated oil plays will look increasingly attractive, and they've generally been the ones that have lagged the market a bit," Wilson adds.
At the smaller end of the market, RBC favours explorer FAR and Karoon Gas, but Ophir Asset Management portfolio manager Andrew Mitchell likes US shale operator Sundance Energy, one of the few ASX-listed operators set to increase production in 2017.
"US operators have a better track record at getting cost out and can increase production quickly as oil rebounds," Mitchell says. "The Australian operators are struggling to grow organically and are still focusing on cost reduction. Regardless of whether OPEC delivers on its promised cuts, oil is going higher."
In the utilities space, bankers are licking their lips with the prospects for another active M&A; year, with NSW's targeted sale of power distributor Endeavour Energy. Cheung Kong Infrastructure's $7.3 billion tilt for DUET Group also has yet to be resolved.
Retail investors should see more opportunities open up early in 2017 with the IPO of West Australian gas retailer Alinta Energy, which was deferred from late last year.
WA is also contemplating the partial IPO of its key "poles and wires" asset, Western Power, although that hinges on premier Colin Barnett beating the odds and prevailing in the March state election.
Angela Macdonald-Smith
You guide to shares 2017:
Part 1: Agriculture, property and bank
