December capped off a very poor year for investors. 2011 started badly with natural disasters (severe floods in Queensland and nuclear disaster at the Fukushima power plant) however this was only a teaser for what was to follow with a European sovereign debt crisis and issues never before encountered (i.e. a common monetary policy with differing government fiscal policies).
The All Ordinaries Index fell 15.2% for the year and closed December at 4,111.00 points – down 1.8% in the month of December. Global share markets were subdued in December with the Dow Jones Index gaining 1.4%, the FTSE gaining 1.2%, the Nikkei 225 gaining 0.2% and the Hang Seng gaining 2.5%.
As we enter 2012 it is appropriate to give some thoughts on the key themes I see impacting investors for this year and beyond. Debt is still a major issue at all levels (government, business and household). It will take considerable time for adequate debt management plans to be implemented and this will be a drag on all asset prices for 2012 and beyond.
The European sovereign debt issues are by no means resolved. Economists have differing views of how to tackle the problem – with some suggesting that the European Union should be dissolved whilst others are adamant that the EU should remain as is. My view is that the EU should (and will) remain. Given that a lower Euro currency assists Germany (who is the second largest exporter in the world behind China), I expect measures will be passed to ensure that the EU remains.
However (and probably most importantly) EU member nations will need to ensure that their government fiscal policies are in order. It is not politically acceptable for Germany and France to keep bailing out their southern neighbours when their social security and government revenue systems are not aligned. There must be a fundamental shift towards collecting taxes and implementing austerity measures despite fierce internal political pressures.
It’s easy to think that too much debt is only an issue for Europe – it’s not, it is a developed world phenomenon. Australian households have increased their household debt as a percentage of their income by nearly 3.5x since 1985. This increase has been the fuel to the fire for asset price increases (particularly in residential property).
It is unstainable to think that Australian households will increase their debt levels at this rate into the future (if nothing else due to tighter bank lending practices) – therefore expect to see a fundamental switch from investors focus on capital growth to income (as lack of leveraged funds dampen capital growth prospects – look no further than Japan over the last 20 years for proof!).
When investing for income it is natural to automatically think of cash and term deposits. Whilst these investments do offer stable income, the rate of interest income has fallen sharply over the last 6 months (and with strong prospects of further rate cuts in 2012 will most likely continue to fall). Share investments provide income by way of dividends (i.e. your share of the company’s profits).
If given the choice between investing in a 12 month Westpac term deposit and owning Westpac shares, based on current rates, you would receive a 5.2% income return on the term deposit. Whereas, with owning Westpac shares you would expect to receive a gross income return (by way of fully franked dividends) in the order of 10.0%!
However, when investing in shares you do carry the risk that the share price is subject to fluctuations (therefore investment timeframe is important) and also that the company may cut or suspend its dividends (thereby removing your entitlement to receive any income at all).
I do consider that Australian shares are currently discounted and that it is a ‘buyers market’ (if nothing else from a pure income perspective – with the broader Australian sharemarket generating a gross income return in the order of 6.5% per annum). However, with the aforementioned sovereign debt issues in Europe price volatility will be a feature of 2012.
With this in mind, I expect the Australian sharemarket to continue to trade between 4,000 to 5,000 points through 2012 – hopefully finishing the year toward the upper end of this range.
I expect 2012 to be a challenging year for residential property. With the removal of the first home buyer stamp duty concessions in New South Wales from 1 January – it will be interesting to see what impact this has on house prices (particularly houses below $500,000).
For this reason, the low net rental yield of property, ‘baby boomers’ needing to extract equity and the ‘capping out‘ of household debt, I am bearish on the outlook for residential property in 2012 (despite the high likelihood of lower interest rates).
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.