April 2013 Review Comments
Written by Tony Gray   
Friday, 12 April 2013 13:30

Portfolio Valuation & Comment

The first half reporting season has not provided much direction to local markets and the picture is very mixed – but we are revising some of our opinions in light of global issues that will ultimately impact on Australia.

For most investors the basic decision is how much to allocate to growth assets (shares and property, both local and international) and how much to defensive assets (cash, term deposits and bonds).

While your individual goals and risk/return profile dictate the investment strategy for your portfolio, the asset class ranges do permit a reasonable move towards or away from growth assets. 

We are now more inclined to add growth assets and reduce cash as the hoped for (short-term) weakness in growth assets has not eventuated.  The decisions of overseas governments recently have been ‘game changers’ as I attempt to explain below.

Japan, the Australian Dollar and inflation…

The decision by Japan to apply unlimited amounts to buying debt and building money supply – to achieve a 2% target inflation rate, lower the Japanese Yen and stimulate their economy means the last major economy is now also participating in ‘beggar thy neighbour’ behaviour.  The Japanese really had little choice but to respond to the decisions of the US, UK, Europe and by association China and most of Asia (who link their currencies to the $US).

The expanded currency wars mean we are less likely to see the Australian dollar weaken in the medium term – whereas previously we had felt that when capital inflows to Australia eased in later 2013 or 2014 (as major mining and energy projects complete) that a weaker dollar would boost returns from international shares.

Consequently, while we see diversification benefits and long-term growth potential from holding international shares, there does not appear to be the need to rush in – so a steady dollar cost average into this asset class remains appropriate.

Inflation in Australia will not be an issue in the short-term and in fact with the weaker Yen there will be downward price pressures on motor vehicles and electronic goods.  However, this will be negative for some retailers and ultimately the creation of huge amounts of additional money must lead to higher inflation on a global scale.

The stronger Australian dollar against our second largest trading partner will be a major challenge both in terms of import competition and also the affordability of Australian exports for Japanese consumers.

Medium to long-term inflation ‘imported’ from overseas will later result in higher interest rates in Australia and there will be nothing the Reserve Bank can do about this through the setting of the overnight cash rate. 

For this reason we recommend not holding bonds or placing money in longer dated deposits.

However, in terms of growth assets, the liquidity flood from Japan and other major economies will most likely result in the price of higher yielding growth assets continuing to rise in the short term – despite little earnings growth.   Whilst many brokers appear to be taking the failure of the market to break through the 5,100/5,200 index mark as a prompt to sell, we do not advocate investors selling down holdings to a meaningful degree (but still maintain some ‘opportunity’ reserves).

For newer clients, who have not had the opportunity to build an ‘appropriate’ weight to equities, we will now be adding more holdings at around current price levels.

While we had become nervous about the price level of listed property trusts, we are now prepared to hold on the basis investors will continue to bid up prices as they chase yield.

Planning Issues

At the superannuation level the introduction of tax on earnings above $100,000 (per member) in pension phase is understandable but for the revenue raised adds far too much complexity and reverses much of the gains from the 2007 reforms.  The key ‘take-out’ is that balancing superannuation balances between members will be the most obvious planning decision.

We are yet to see what ‘reforms’ come out of the May budget – but there is undoubtedly a trend to increased taxation rates, rather than constraining expenditure to sustainable levels.

Best wishes,

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

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


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