The last five years were all green lights, loose money, and bull markets, but 2015 has been different. New themes are being forged and new winners are being made; these are our top 10 predictions for your portfolio in 2016, a year that could change everything.
2016 could be a great year for the two billionaires, Warren Buffett and Donald Trump.
Trump will become president and Buffett will solidify Berkshire Hathaway’s (NYSE: BRK-B) future with his biggest buy ever.
Donald Trump rode into the Presidential race on a great white stallion. He appears to be the hero that America has been waiting for.
The attacks on Trump are only making him more appealing and with his own bankroll, he “can’t be bought” like other politicians. The American people want pragmatism in Washington. Trump is giving it to them.
He’s not the status quo and might be just what the stock market needs. With that in mind, there’s no stopping the force that is Donald Trump. All we can do is prepare our portfolios for it.
Here are the top 10 predictions for 2016:
No. 1 Prediction for 2016: Trump wins the election
Recall that in the early 1800s, Andrew Jackson, won the presidency by being an unconventional populist.
Trump certainly has more than just a chance at being President. Along those lines, the best portfolio for such a win would be U.S. focused companies. The “wussification” of America will be over if Donald Trump wins. So companies doing business overseas are going to be disadvantaged.
Trump wants to do away with corporate taxes and lower federal taxes. To counter that, Trump plans to impose a tariff on foreign imports and tax any outsourcing to foreign countries. The move will de-globalize America and put a damper on free trade; hence, the U.S. focused angle.
A few examples of stocks that will still do well with Trump in the white house include Whole Foods (NASDAQ: WFM), the U.S. centric retailer of organic foods; Macy’s (NYSE: M), the department store retailer; and CarMax (NYSE: KMX), the used car retailer.
No. 2 Prediction for 2016: Gold falls below $1,000 an ounce
Much to Trump’s disappointment, gold will continue to be a disaster. Trump was touting gold in 2011, the same year it peaked at over $1,800 an ounce.
Gold has fallen close to 10% year-to-date and will likely fall below $1,000 an ounce in 2016. The continued strong dollar will keep hurting gold and the allure of it as a diversifying asset has diminished. Instead of using gold as a safe haven, investors have been flocking to U.S. Treasures — which are backed by one of the strongest economies in the world. Something that resonates with foreign investors looking for safe returns.
Thus, it appears safe to say that owning Goldcorp (NYSE: GG) and Barrick Gold (NYSE: ABX) is a poor investment strategy for 2016.
No. 3 Prediction for 2016: Gold not the only commodity to feel the pain
While gold is facing a lot of pressure, other commodities won’t get off so easy either. This includes coal, copper, and iron ore. The key commodity user, China, is starting to show signs of cracking. These signs point to a slowdown in the economy. Something that’s been coming for years and China is running out of tools to prop up its market.
But the bigger issue is that China is the largest consumer of most commodities. This is bad news for commodity-reliant countries like Brazil and Australia. Companies to avoid here include Brazil’s Vale (NYSE: VALE) and Australia’s BHP Billiton Limited (NYSE: BHP).
Vale focuses on mining iron ore and BHP is a miner of iron ore, copper, coal and aluminum. China is the world’s leading consumer of iron ore, aluminum, copper, and coal — consuming over 40% the global output of each commodity.
With that, if China isn’t a great growth story anymore, then it won’t just be Vale and BHP feeling the pain in 2016. Everything from steel to liquified natural gas companies will be hurting.
With that, other names to avoid include major commodity-tied stocks like Freeport-McMoRan (NYSE: FCX), Cheniere Energy (NYSE: LNG) and United Steel (NYSE: X).
No. 4 Prediction for 2016: The fight for $15 an hour minimum wage is won
Now, this isn’t a Trump play, but it’s not up to him. Earlier this year, Trump said that a low minimum wage wasn’t bad for the U.S. However, he’s got bigger things to worry about than simply keeping the minimum wage low.
However, the key is, who wins? Well, more than likely, a lot of people.
One of the big, underrated, winners of a higher minimum wage is Wal-Mart (NYSE: WMT). The world’s largest employer has seen its stock fall 25% over the last twelve months. Shares are now trading at the lowest earnings multiple that we’ve seen in over three-years. Plus, it’s offering a 3% dividend yield.
Wal-Mart will win because its vast employee base will now have more buying power. The beauty of this is that their employees will likely plow this wage increase back into Wal-Mart and other parts of the economy, as opposed to using it to pay down debt. Meanwhile, higher wages will help attract higher quality employees that will treat customers better and be more productive.
No. 5 Prediction for 2016: We might see an interest rate increase
That’s right, the Federal Reserve might increase rates in 2016. The last time the Fed raised rates was 2006. In order to see a December rate hike there would need to be marked improvement in the housing sector, hourly wages and workforce participation. A tall ask.
By all accounts, the slowing Chinese economy will push a rate hike into 2016, assuming things don’t get worse on the international front before the March Fed meeting. The Fed chair, Janet Yellen, has said that the Fed will need considerable time before a rate hike — “something on the order of six months or that type of thing,” Yellen commented.
Even still, there are stocks to own amidst this rate confusion. This includes many real estate investment trusts (REITs). Stick to REITs that operate in non-discretionary categories, like healthcare and offices. Top picks include Ventas (NYSE: VTR) and Boston Properties (NYSE: BXP), which offer a 5.4% and 2.2% dividend yield, respectively.
Ventas runs seniors housing, specialty care facilities, hospitals and medical office buildings. The growing aging population is a key tailwind for them. Boston Properties owns various quality buildings in select markets, allowing it to enjoy strong demand in good and bad economic times.
No. 5 Prediction for 2016: Financials finally have their year
Many banks and financial institutions haven’t fully recovered from the bursting of the housing bubble. The Financial Select Sector SPDR (NYSEArca: XLF) has been underperforming the S&P 500 for close to five years.
However, legal costs are subsiding and the big banks are finding ways to make up for lower mortgage banking revenues. For the well-capitalized banks, and large diversified ones, a further delay in interest rates won’t be material.
Of note — the Financial Select Sector SPDR is still down 40% from its 2007 highs. This includes Bank of America (NYSE: BAC), which is down 70% from pre-financial crisis highs and trades at just 70% of book value. It’s still a force to be reckoned with in the space, having added the Merrill Lynch brokerage arm to its suite of offerings after the financial meltdown. It still also has a stronghold in commercial lending, with many of its mortgage-related problems behind it.
No. 6 Prediction for 2016: Riding in style
We might be riding a bit differently come 2016. This includes the electric vehicle boom. Tesla (NASDAQ: TSLA) is the leader, for now. But there’s a lot of competition that could hit the market in 2016.
This could be bad news for the likes of Tesla where the influx of competition is sure to strain the stock. Porsche and Audi are entering the EV market, with Porsche revealing its Mission E — which is quicker to charge and faster than what Tesla is putting out. Then there’s Volkswagen, which plans to roll out 20 EVs within the next few years.
Beyond that, the natural progression from EVs is to full-blown driverless cars. And we could be closer than many expect. There’s a land grab of sorts going on in Silicon Valley to buy up technology companies that are the bedrock for making driverless cars a reality.
However, driverless cars won’t be great for everyone. Buffett has said that he’s skeptical of driverless cars, noting the impact it could have on insurance companies. As Warren Buffett notes, driverless cars “…would be wonderful but we would not be throwing a party at our insurance business.” He also says, “If it is a safer way of driving, it is good for society and bad for our insurance business.”
No. 7 Prediction for 2016: No more watching cable
Watching cable on the TV could change a lot in 2016. Not that things haven’t changed over the last few years, but more and more people are cutting the cord and others just aren’t signing up for cable at all. Conventional cable is broken as we know. CNN even provided an online stream of the Presidential debate.
With the move to online watching, the obvious play is Netflix (NASDAQ: NFLX), right? But Netflix is transitioning away from providing a streaming service to a content creator. The latter is a tough market to operate in, just ask Dreamworks Animation (NYSE: DWA), whose shares are off 42% for the last five years.
Along those lines, there will be consolidation come 2016.
The likely players are the smaller cap ones. AMC Networks (NYSE: AMCX) may well buyout Starz (NASDAQ: STRZA). Or LionsGate (NYSE: LGF) could step up and take out Starz. An investor that’s done almost as well for himself as Warren Buffett, is John Malone, and he could be the impetus to really push the cable industry into the 21st century. He owns stakes in the likes of Starz, LionsGate and Discovery Communications (NASDAQ: DISCA). Not to mention various other cable assets.
No. 8 Prediction for 2016: Oil stays below $50 a barrel
$50 oil for another year could really hurt portfolios that were banking on a quick recovery. And the longer-term outlook isn’t much brighter. Organization of Petroleum Exporting Countries (OPEC) assumes oil doesn’t hit $80 a barrel until 2020.
The surplus of oil is proving to be much greater than anyone expected, in part, thanks to the U.S. Shale oil boom, an economic slowdown in Russia, China and many OPEC member countries has all taken its tool on demand in the oil market.
Nonetheless, the major master limited partnerships (MLP) will still be winners if oil remains lower for longer, where they make money on the oil they move, regardless of the price. But even being remotely associated with oil puts them in the crosshairs. The Alerian MLP Index (NYSEArca: AMLP) is down 28% over the last year. So when things get tough, the broad answer is consolidation.
Williams Companies (NYSE: WMB) is the interesting play in the industry. It could be a buyout target, but it’s also one of the largest players in the industry. It could be a buyout target for Energy Transfer Equity (NYSE: ETE) and offers a 5.5% distribution yield. Even if it doesn’t get bought out, the other catalyst is that it’s buying up its subsidiary Williams Partners (NYSE: WPZ), which will lower the cost of capital for the company.
No. 9 Prediction for 2016: Buffett makes his biggest buy ever
Earlier this year, Warren Buffett made waves when his Berkshire Hathaway (NYSE: BRK-B) made its largest purchase ever — buying up Precision Castparts (NYSE: PCP) for $37 billion. 2016 could get Buffett involved with an ever bigger buy.
It all starts with beer.
Anheuser Busch Inbev SA (NYSE:BUD) is looking to buy fellow beer maker SABMiller plc (OTCMKTS:SBMRY). This would bring together the world’s two largest beer makers, together the two will control 40% of the beer market.
And there’s an opportunity for Buffett to get involved. Back in 2008, Buffett owned Anheuser-Busch when InBev showed up to buy the company. Buffett sold his shares early, thinking the deal wouldn’t get done. However, InBev was backed by 3G Capital and the deal did get done.
Buffett won’t miss out again. He now knows just how good the 3G guys are, having partnered with them to buy Heinz in 2013. Then, the two merged it with Kraft just this year.
The 3G Capital founders are still major shareholders of InBev. Buffett’s opportunity comes about as InBev will need a lot of financing to get the SABMiller buyout done — so he may well get a call from 3G to help.
This is a great way for Buffett to put his growing cash hoard to work and really make a splash as he gets closer to retirement. Even if Buffett doesn’t show up to help with InBev’s buyout of SABMiller, his Kraft-Heinz (NYSE: KHC) will be in a better position to make its next big buyout come 2016.
Likely candidates for Kraft-Heinz includes potentially buying up Mondelez (NASDAQ: MDLZ) or getting involved with Pepsico (NYSE: PEP) to force a spinoff of the snack foods business. In the case of a spinoff, Kraft could buy up the Pepsi snack business.
Things should finally come full circle for the 85-year old in 2016.
No. 10 Prediction for 2016: The PC is done
The death of desktops and laptops could finally be realized in 2016. The big losers will be the computer chipmakers, such as Intel (NASDAQ: INTC) and Advanced Micro Devices (NASDAQ:AMD).
Microsoft (NASDAQ: MSFT) thought they’d reinvented how we listen to music with the Zune. Then came along Apple with the iPod and proved them wrong. Microsoft thought they’d found a computer replacement with the Surface. It looks like Apple is going to prove them wrong again with the iPad Pro — which runs the full Microsoft Office suite.
When faced with a question on the cannibalization of the Mac computers by the iPad, Apple (NASDAQ: AAPL) CEO Tim Cook noted, “I think that some people will never buy a computer. Because I think now we’re at the point where the iPad does what some people want to do with their PCs.” This is more bad news for Intel than anyone else. The iPad Pro is running Apple’s ARM-based chips and not Intel’s x86 chips. Intel’s’ x86 chips account for 45% of its client revenues.
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