July Review Comments
Written by Tony Gray   
Friday, 16 July 2010 10:49

Investment Markets

We have now entered the post recovery phase for Australian and international sharemarkets and listed property.  Price ranges are being established for many markets and whilst the risk that a slowing US and Chinese economy and debt concerns in Europe may lead to a renewed bear market phase, it is more likely that markets will range sideways – with bouts of pessimism and optimism.  We further expect that this will be the ‘new normal’ for the next few years – albeit with the hope that we see a gradual upward trend for the range.

Investors have a key decision to make in handling the current environment:

1. To retain higher levels of defensive cash and fixed interest investments and not participate to the normal extent in growth assets and limit the damage from a renewed bear market.  This will by nature limit your ability to take some gains when markets rally; OR
2. Accept the risk of losses from a renewed bear mark and selectively add growth investments – with the intention of converting some gains to cash at the higher end of the established range (~5000 points for the Australian market).

We are more inclined to the latter decision, but adopting a more conservative investment stance is perfectly legitimate for those prepared to accept likely lower but more secure returns.

Cash & Fixed Interest

The Reserve bank paused interest rate increases in July, but with the high rate of pay awards in the government sector and through the Fair Work Commission, it is inevitable that we will see higher rates of inflation develop UNLESS the Reserve Bank increases interest rates to slow the economy – monetary policy is a very blunt instrument – especially when it has to work against expansionary government fiscal policy.

Term deposit rates have not changed in recent months – suggesting only modest increases in official cash rates are expected.  For investors more concerned about the prospect of a global financial crisis mark II – where interest rates will again fall sharply, then applying some funds to 2 and 3 year term deposits may be considered.  For investors looking to take advantage of dips in the market to add to growth assets, the premium for 3 or 6 month term deposits compared to at-call accounts is now relatively low.

Growth Assets

Prices of listed property trusts with an Australian focus have held up very well given recent market weakness and whilst we are not expecting strong capital growth in the next couple of years, we do expect income yields to rise as trusts return to distributing all earnings.

With a focus on rental income streams and inflation linked rent rises, we see listed property as providing a good mix of income and modest growth.

Many international investors buy the Australian market for an exposure to Asian growth.  When these investors exit the market, we tend to see the Australian dollar and Australian shares fall.  Asian stockmarkets also have a high weighting to the financial, mining and energy sectors - just like Australia.  There is also the reality that the Australian sharemarket is becoming highly concentrated.  In order to gain true diversification, a focus on sectors not well represented in Australia is recommended when buying international assets – particularly IT and healthcare. 

Australian shares are trading at below historical levels relative to earnings.  I expect this is partly since the ‘market’ believes analysts are overly optimistic when forecasting earnings growth.  It is also since a period of slower global economic growth is expected.

We continue to generally add modestly to growth assets on an individual basis, since income returns and balance sheets appear healthy and the fear of a renewed bear market and/or global recession is creating the opportunity to buy with a margin of safety.  All the same, allocation to growth assets is at the lower end of the Investment Strategy ranges set for most portfolios.

We have a number of listed property, international and Australian shares we feel represent sound value at the present time and can consider in light of your portfolio in our next review.  As always, you’re encouraged to initiate contact to discuss planning and investment issues.

Please treat the above comments as General Advice, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Thursday, 16 September 2010 11:03
 

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