January 2012 Review Comments
Written by Tony Gray   
Monday, 06 February 2012 00:00

Portfolio Valuation & Comment

Investment markets were difficult in 2011, with Australian shares declining by 15% over the course of the year.  International shares (MSCI index) and local listed property (S&P/ASX 200 A-REIT) declined by between 7% and 8%.  Term deposit rates fell, as did cash interest rates late in the year.  Bonds generated a positive return, as did gold - although the latter declined from July peaks.

The decline in asset prices has not generally been accompanied by falling earnings or dividend payments and in this sense the income yields and pricing of assets has become more attractive – especially as interest rates have fallen.  This is partly since there has been a reduction in profit growth expectations and partly due to fear about sovereign debt leading to a second credit crisis.

Ordinarily I would advocate applying cash reserves to growth assets with the current income yields and below average pricing of assets; especially as most Australian companies and trusts have reduced gearing and extended debt maturities in recognition of the risks to credit markets.  However; the risk of sharp falls in asset prices is real if global deleveraging occurs too rapidly – with associated recessions and lower asset prices.

The other risk is that the huge quantities of new money being created by central banks will eventually feed into inflation – and in this scenario the impact on the real value of cash and fixed interest could be significant.  Indeed I expect that listed investments would outperform cash and fixed interest investments in this scenario. The very long-term returns in Australia from fixed interest have been 2% above inflation and from shares have been 7% above inflation (includes dividends and capital growth).

For this reason diversification between asset classes and a focus on less cyclical businesses (i.e. more defensive), with lower levels of debt and with lower capital intensity, is still recommended.  Maintaining rolling term deposit maturities eases the timing risk from either sharp interest rate falls or rises over the next few years.

Perhaps the most important changes do not occur at the portfolio level, but at a personal level.  A focus on reducing debt and expenditure and assuming that investment returns will be lower than for most of the past 20 years is a prudent course of action.

Policy makers (including state and federal governments and the Reserve Bank) appear to be working on the basis that Australia will not be subject to any overseas shocks.  The Federal Government in particular has enacted policies that stifle growth and productivity and make Australia even less competitive – at a time when forced major reforms are occurring elsewhere in the world.

I recommend holding a higher than normal weighting to cash in the form of a high yielding at-call account.  Should we see an inflationary, credit or other ‘shock’, then short-term panic selling will present buying opportunities.  Accepting a short-term income return and having opportunity money available may pay off handsomely in 2012.

We expect in February that first half reports and guidance on 2012 financial year results will lead to some portfolio adjustments.

Our focus early in 2012 is to review the overall positioning of portfolios and any planning issues.

As always, if there is a material change in your position or goals, or if you have any investment or planning queries or concerns, please contact me. 

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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