January Review Comments
Written by Tony Gray   
Friday, 22 January 2010 14:06

Our general focus in the first two months of 2010 is to review investment portfolios, before switching to planning issues well ahead of the May Federal Budget – where the risk of legislative change is high in light of the numerous reviews – particularly the Henry Tax Review and Cooper Superannuation Review. As always, if you have any planning or investment queries, please contact us.

Outlook Comment

World markets, including Australia have generally strengthened from mid-December through January to date.  Belief in a strengthening globally economy is growing cautiously.

There remain many issues that could trigger a down-turn in markets – the most likely a failure of corporate earnings to recover at the rate forecast by higher share prices.  The failure of major developed economies to reduce debt or deal with the over-reliance on consumption is widespread and in fact debt levels are higher than ever – it’s just that more of this debt is held by government now.

Much of this debt in the United States and United Kingdom has been ‘paid’ for through the issuance of currency – if it was Zimbabwe it would be explained as ‘printing money’ and not the more politic term ‘quantitative easing’.  To gain some idea of the extent, around $1.2 trillion of the $1.5 trillion US deficit was ‘paid’ for through printed money.  The balance of $300 billion was borrowed and around $100 billion of this was from China.  Expect higher inflation and interest rates to eventuate and this will flow on to Australia due to our reliance on overseas borrowings to balance our spending.

Despite the risks, historically the second year of recovery after a major market fall tends to generate quite healthy returns.  This was evident following both the 1973 and 1987 market crashes.  There is sometimes a pause or correction (in 1988 the market pulled back by 15% from the post 1987 peak, before rallying higher into 1989).  As such, maintaining a bias to growth assets (within your investment strategy ranges) is recommended.

Unfortunately the other reason to maintain a bias to growth assets for 2010 is that I am not optimistic about the returns in the years to follow (i.e. gain higher returns while they are available).  A massive de-leveraging process will inevitably require slower global economic growth and for consumers to consume less and save more.  Lower rates of growth would normally see lower price-to-earnings multiples placed on growth assets.  I expect investment markets to range sideways for an extended period post 2010.

Cash & Fixed Interest

Interest rates are expected to rise again when the Reserve Bank meet in February.  I recommend keeping maturities short (3 to 24 months) due to rising rates and the risk of inflation.  We are finding ‘specials’ most months for various terms that are well above the standard rates.

Growth Assets

I will repeat the paragraph noted in the December review – as it relates to the reasonable long-term returns we could reasonably ‘hope’ for, as opposed to the higher returns we have come to expect since the mid 1990’s:

A Credit Suisse analysis shows that Australian shares generated the highest return of ALL global sharemarkets over the past 100 years – at around 7.0% p.a. after inflation.  By comparison, after inflation bond returns were not quite 2.0% p.a.  Assuming the Reserve Bank are successful in keeping inflation within the 2.0% to 3.0% p.a. target band and that the very long-term returns are maintained, this suggests long-term returns of 4.0% to 5.0% for fixed interest and 9.0% to 10% for Australian shares.

For Australian shares, we are not adding retail exposure, as this seems to have priced in growth recovery.  Companies such as Sims Metal (SGM) provide an alternative exposure to the metals sector and defensive stocks such as Woolworths (WOW) are out of favour but offer solid value.  A riskier recovery stocks to consider is Brambles Limited (BXB) and Toll Holdings (TOL) is well positioned to benefit from long-term growth in the Asian region, although this is partly priced in.  AMP Limited (AMP) is inexpensive, particularly when considering the takeover offers for AXA Asia Pacific.  QBE Insurance remains cheap for such a high quality business.  Smaller companies such as IMF Limited (IMF), a litigation funder; WDS Limited, a service provider to the mining and gas sectors; WHK Group (WHG), an accounting and financial planning group; and MyState Financial (MYS), a Tasmanian banking and financial group continue to represent value.

The number of quality listed property trusts in Australia trading at the ‘right price’ remains a select group – we continue to accumulate GPT Group and Dexus at slightly lower than current prices.  We are hoping for a price drop to include Westfield Group.

Please contact us with any planning or investment queries.

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 Friday, 22 January 2010 14:15

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