January 2012
2012 - The Year Ahead
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Welcome to the New Year! I hope everyone had a happy and safe summer holiday and that 2012 brings you prosperity and investment success. For many investors 2011 was challenging to put it mildly. World equity Markets had a weak December finishing off an already down year. In 2011 growth assets (shares and property) performed poorly whilst defensive assets (cash and fixed interest) produced positive result with fixed interest the clear standout winner. Gold also performed strongly returning 9.8% in AUD terms. The share market was extremely volatile and in the second half of the year it seemed to lurch from headline to headline as concerns about European sovereign debt and European banks dominated the news. The ASX 200 finished the year down 14.51% underperforming the S&P 500 which finished unchanged (0.0%), the Dow Jones (+5.53%) and The FTSE (-5.5%). The Australian share market did outperform some European and Asian stock markets as well as the share markets of some emerging markets. The table below highlights the returns in 2011 of a selection of assets and currencies in local currency terms.
The Asset Allocation Decision
My regular readers will be familiar with my statement that the most important investment decision is your assets allocation decision. The variance in returns of different assets highlights the key reason investors need to have a diversified portfolio – risk reduction. The past 4 years have seen investors struggle with stock market returns and as a result a huge sum of money has been allocated to conservative assets like cash and term deposits. However many Australian investors overlook the bond market or fixed interest as a good defensive option. This is largely because it is difficult for investors to access government bonds or corporate bonds directly because the large investment minimums. However there are alternatives in the form of professionally managed bond funds or fixed interest funds which allow investors to access this asset class with professional management. Bonds funds have the potential to provide investors with both capital gains as well as interest income. Traditionally when stock markets perform poorly governments tend to lower interest rates to stimulate the economy which is good for bonds and bond funds. When the economy is growing strongly and governments raise interests rates to control inflation then this has a negative impact on bonds. This month we are highlighting a few of the better performing bond funds that you might like to consider for your portfolio.
Outlook for 2012
Personally, I believe that 2012 will present investors with two very different halves. The first half will remain volatile until the situation in Europe shows signs of a resolution. However I do believe that European leaders will eventually resolve the crisis but Europe will have the “recession it has to have” albeit it a mild one. The second half of the year will be positive for shares with continued low inflation, an improving US economy and continued strength in developing economies despite European economic weakness. Remember the stock market moves today in anticipation of the future and a stronger economy translates into higher company profits and higher share prices. I plan to increase my exposure to shares and add to my portfolio throughout the year by buying shares when they are sold down in order to be positioned for the inevitable market upturn.
The chart below show the returns for the All Ordinaries Accumulation Index (returns include dividends) for each year from 1980-2011. In the past 32 years, with the exception of 1981 and 1982, every negative year has been followed with a strong positive share market performance and only 9 of the 32 years produced a negative return (28% of the time). The current environment has its challenges but it doesn’t compare to the high double digit interest rates experienced in 1981-82.
By almost any measure stocks appear to be good value but the world needs to deleverage (reduce debt) and the impact of austerity measures on the global economy and individual economies remains uncertain. Now might be the time to reassess your asset allocation decisions and endeavour to further diversify your portfolio. The immediate short term outlook for shares and property in Australia appears to have significant risk. The key to investment success in 2012 will be diversification. For more information on fixed interest funds and bond funds, please click on this link. |
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Investment Commentary
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Since 1997, Michael Lannon has been providing members of Australia’s leading professional associations with access to tools and information to help them become better investors. Michael regularly contributes to the Australian Dental Association's News Bulletin and offers investment seminars for DIY investors.
To access previous commentaries please visit this link.
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