Media Watch: Crisis, Bounce, Doubt, Belief by Brian Thomas
04/02/2011
It has now been over three years since the Australian sharemarket peaked in November 2007. So, what's in store for 2011? To put this year in perspective, let's look at how the last three years shaped up.
| 2008 | The year of Crisis, with markets in turmoil as the sub-prime crisis turned into the GFC. |
| 2009 | The year of the Bounce, with the Australian sharemarket up nearly 40% as governments around the world opened up their stimulus cheque books. |
| 2010 | The year of Doubt, with major concerns about a double-dip recession in the US and sovereign debt issues in Europe causing investors to question a global recovery. |
| 2011 | I believe this year could eventually be known as the year of Belief, as investors’ confidence in the future of the global economy rebounds. That said, it will unlikely be a smooth ride. |
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This is typical of a This is typical of a major financial crisis, where growth assets have a substantial pause before the next leg of the recovery. More importantly, what does this mean for the major asset classes in 2011? To get you thinking about possible strategies for your clients, a quick summary is set out below.
Growth Assets
Australian Shares: The Australian dollar (AUD) has caused many overseas investors to be wary of the Australian market. However, with shares trading at 12.8x forward PE and trailing the US in terms of returns, I see some great upside from this point.
Australian Property: After being the asset class that in many ways suffered the most during the GFC, Australian property has now recapitalised and is trading at 12.6x forward earning with good (plus 6%) dividend yields. Importantly, the underlying real estate fundamentals now look healthy with good pricing anomalies to exploit over the coming year.
International Shares: Clay Carter, Head of International Equities believes confidence will return as the year plays out, with countless opportunities for stockpickers in a two speed (developed vs emerging) world. Currency will most likely not be a headwind this year, strengthening the case for unhedged international allocations.
International Property: Low interest rates globally have fuelled asset prices and the sector has already re-rated. I see this market as being a bit overvalued at current levels.
Defensive Assets
Australian Cash: The RBA said it will look through near term growth and inflation volatility from the floods. A period of steady cash rates is in store but, as the economy recovers over the second half of the year, the RBA is expected to nudge the cash rate higher. By end 2011, I expect a cash rate of 5% to 5.25% and 5.25% to 5.5% by the end of 2012.
Australian Fixed Interest: Australian bond yields have risen back to longer run levels (running yield around 5.5%), with most of the capital loss from rising yields behind us. Overall, expect returns at least around cash levels, with scope for some upside during periods of heightened risk aversion.
International Fixed Interest: This sector is outright expensive and has yet to experience the capital loss associated with yields rising back to longer run levels. Advanced economy yields are vulnerable to better economic data and adverse sovereign debt and fiscal developments.
Currency
Australian Dollar: If we see a run of volatile flood affected data, there is scope for a reduction in tightening expectations, which could see the AUD fall. However, once the economy recovers from this shock, expectations will likely shift back to further tightenings and this should be supportive of the AUD. Looking further ahead, once the ECB and Federal Reserve begin tightening, short term interest rate differentials should begin to narrow, which could see a period of sustained decline for the Aussie Battler.
