April Review Comments
Written by Tony Gray   
Tuesday, 20 April 2010 17:38

Outlook Comment

The All ordinaries Index has just broken through the 5,000 point barrier and there is a real possibility that shares rally higher.  International shares and official interest rates have also risen in the past month.

Eventually governments will be unable to satisfy bond market demands and will pay higher interest on maturing and newly issued debt – forcing government sector cutbacks in most of the developed world.  We can expect to see slower rates of economic growth.  Accordingly, we also expect that returns from growth asset classes will be below those expected by most investors since interest rates began falling in the early 1990’s.  Quite simply, rising interest rates are likely to limit returns from shares and property.

Despite this, we also know that it has historically paid to maintain exposures to inflation hedging assets such as shares and property, rather than relying only on defensive cash and fixed interest investments.

Cash & Fixed Interest

The Reserve Bank of Australia lifted interest rates by another 0.25% this month to take the cash rate to 4.25%, with several more rises expected this year.  Term deposits have not moved higher following the latest cash rate increase.

Whilst we suspect a break-out of inflation is possible, the interest rates offered on 1 to 3 year term deposits compared to current inflation are very attractive.  Last month Commonwealth Bank offered the best 3 year interest rate of the major banks, but presently ANZ is the best of the four major banks, with 7.00% p.a.  After 12 October 2011 the guarantee on bank term deposits is scheduled to end and in most cases we are sticking with the big four banks for deposits maturing after this date.


We recommend some exposure to gold in portfolios as a hedge against a falling Australian dollar or outbreak of inflation.  Newcrest Mining represents the largest Australian miner, is a very low cost producer and has little or no debt.  The exchange traded commodity fund (trading under the symbol GOLD) provides an Australian dollar gold price exposure, backed by physical gold.

Australian Shares

Individual stock opportunities continue to appear regularly.  We have used the listed investment company Argo Investments (ARG) recently as an asset class ‘balancer’ – where we have purchased shares for a broad market exposure to satisfy investment strategy allocations.  The stock is (unusually) trading at a minor discount to asset backing and provides a share exposure at less than half the cost of an exchange traded or index fund – with the added benefit of reliable fully franked dividends.

We expect Australian shares will generate a healthy return during 2010 but also expect only modest returns on a 3 to 5 year basis.  A neutral weighting relative to investment strategy ranges is recommended.  For active or trading portfolios, we expect to see ranging share prices and markets develop over the next few years, as investors are unlikely to become excessively optimistic and more willing to take profits – the normal reaction following a sharemarket boom, bust and recovery.

International Shares / China

The Australian dollar is captive to the demand from China for Australian mining resources.  Any slow-down in China could see a sharp drop in the currency – to the benefit of international shares and one reason why we feel some allocation to the sector is justified in most portfolios.

A property bubble exists in China at present – one statistic from past Morgan Stanley Chief Economist Asia, Andy Xie, is that a person on an average income would take more than 20 years to pay for a property in a major city if applying 100% of their income to the purchase!  Accepting the risk of ‘statistics’, vacancy rates are also rising sharply and the government has lifted minimum deposit levels and removed central government guarantees for provincial government borrowing (who are responsible for the lion’s share of property and infrastructure development)  - so there are clear warning signs.

We are introducing specific international exposures that provide true diversification from the Australian market – such as healthcare and IT that form only a very small portion of the Australian sharemarket.


From 1 July this year withholding tax for offshore managed investment trusts holding Australian commercial property will have been cut sharply to 7.5% from 30% in 2008.  We expect this will attract institutional interest given high rental yields, the robust economy and stable legal framework in Australia.  Many listed property trusts hold the view that prices have stopped falling and Mirvac’s $500 million capital raising was over-subscribed, with funds earmarked for acquisition and not debt reduction.

We are modestly increasing listed property exposure in most portfolios, although the field of quality trusts is quite small and necessitates accepting some international exposure.

You are welcome to contact us with specific investment and planning queries.

Best wishes,

A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin, MAICD

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.


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