December 2011 Review Comments
Written by Tony Gray   
Friday, 03 February 2012 00:00

Portfolio Valuation & Comment

Current investment markets are extremely difficult to ‘read’ at present.  If considering Australia in isolation, then a significantly higher allocation to non residential property and shares would occur based on the income premium compared to at-call, term deposit or bond returns.  When considering the over-leveraging of the global economy (not just Europe) coupled with structural budget deficits and ageing populations in the developed world, then an extended period of low growth and intermittent recessions leads to caution on valuations for all growth assets.

Apart from deciding on the proportion of funds in growth assets and defensive assets, appreciating the risk return proposition for each investment is worthwhile.  For example, in our view it is more prudent to hold government guaranteed bank term deposits and lock in an interest rate; in preference to unsecured bank income securities paying a floating interest rate.

Similarly, whilst resource stocks now look cheap, bond markets warn that a sharp fall in metal prices is a possibility.  If falls eventuate then any mining business with a high operating cost will rapidly fail and with them will go their development expenditures.

I strongly encourage anyone with questions about their portfolio positioning to contact me.

Cash & Fixed Interest

At-call rates are declining in line with cuts in the Reserve Bank’s overnight cash rate.  So far term deposit rates seem to be holding up (after declining for the past 18 months) as the banks seek more local deposit funding while international markets are effectively closed.  Eventually we expect to see lower term deposit rates and hence continue to recommend including some longer dated maturities in the fixed interest portfolio.

International Shares/Investment

We are reluctant to materially lift allocations to international shares at present.


It is very much a case of patient accumulation with reference to listed property trusts – with price ranges of 10% to 15% common.  At the lower end of the trading range the discounts to asset backing approach 20% and yields 7% p.a. with an inflation linked bias to income growth.  The larger trusts generally have quite low levels of debt and run a far more prudent debt profile (staggered maturity of debt, reducing future refinance risks) compared to 2007/08.

Australian Shares

We see no clear path through the uncertainties that have produced such divergent opinion about the future.  I would be more comfortable recommending higher share allocations if more commentators were negative!
Valuations are attractive on current earnings, the earnings outlook is unclear but likely to be subdued, income yields are attractive relative to fixed interest and balance sheets are sound.  The risk of further falls is quite real due to (1) sentiment flowing from debt issues in Europe and future risks from the US, (2) concern that China has experienced a development bubble that will see reduced demand for Australian commodities – with the bubble perhaps pricked by recession in Europe, and (3) as bond markets are pricing in recession and we are likely quite early in the interest rate cut cycle.


We recommend holding some Betashares USD ($US) exchange traded fund units.  This is on the basis that major falls in share valuations will be accompanied by a falling Australian dollar.  USD units are bought and sold on the exchange and trade with a very narrow buy/sell spread.  For a copy of the product disclosure statement go to
Holding USD is only recommended on a short (less than 12 month) time frame and as a hedge.  The intention is to cash in the hedge in the event of a lower sharemarket and apply proceeds to buying growth assets.

Have a safe and enjoyable Christmas and New Year break.

Best wishes,

A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin
Principal, TG Financial

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, 22 March 2012 13:00

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