2013 ended up being a second strong year for investors, especially for those with a good allocation to shares, as threats in place at the start of the year faded and the world continued to enjoy low inflation, improving growth and low interest rates.
2014 is expected to provide further improvements to economic growth, hopefully trickling down to Australia too next year, with continued low inflation and low interest rates providing a supportive environment for growth assets.
Last December we included Shane Oliver’s forecast for 2013 so the table below summarises how his forecast fared against actual returns for the year to November, before including his forecasts for the year ahead*.
Source: AMP Capital, Morningstar, REIA, Thomson Reuters, van Eyk Research
* 2013 forecast by Shane Oliver (AMP Capital); 2013 actual is 11 months to November
While shares are no longer as cheap as they were a year ago, and even if the forecast returns for next year are too high, at current levels we can still expect some decent returns from growth assets, but as the figures from the table above shows, forecasting is notoriously difficult.
Rather than placing too much reliance on short-term forecast and trying to pick next year’s top-performing asset class we recommend rather diversifying across a range of asset classes, in line with your risk tolerances and desired outcomes, while seeking to avoid buying assets when they are fully valued and trying to top up on assets while they are cheap to fairly valued.
Australian fell 1.3% in November and continued to fall into December, down ~7% from Nov peak to the ASX200 index at around 5100. After a very strong performance in the calendar year to date international investors trimmed their Australian portfolios ahead of expectations a depreciating local currency will eat into their profits.
Energy, utilities and industrial lead the losses while diversified financials and healthcare fared better, with returns for the last 12 months reducing to 23%.
The correction has moved Australian shares back from ‘fair value’ in November (with expected 10-year returns around 9.0%pa) back to ‘cheap’ at the 5100 level in early December (with expected 10-year returns around 9.9%pa, providing a good opportunity for those still underweight the asset class to top up.
The Small Cap accumulation index fell much harder than the larger stocks, down 5.23% in November to bring returns back down to a flat -0.1% for the last 12 months.
International shares rose 2.3% in November in local currency on further signs of better economic growth and was up 5.7% in Australian dollar terms due to depreciating of our currency against the US dollar. The world market is now up over 38% for the last 12 months for Australian investors, despite less than ideal economic conditions, but volatility is expected as US taper talks resume in December.
International markets, especially the US, are nearing the top of the fair value range and are close to becoming fully priced, reducing expected 10-year returns to around the 7.6%pa mark. Those who have missed out on buying into the US market may be better off waiting for price volatility from issues like tapering discussions before topping up, or using an active manager to gain international exposure.
Emerging Markets were flat in November as the continued to be out of favour with many investors, on concerns about subdued growth in the developed world hitting emerging economies harder.
This means emerging economies remain close to cheap for longer-term investors, with expected 10-year returns of around 9.4%pa from current levels, but with more expected price volatility than for developed markets.
The non-US part of the international share market may still provide opportunity for those investors who missed out on moving into international shares from Australian over the course of the year.
Property and Infrastructure
For yet another month the Australian listed property underperformed the wider share market, falling 2.8% in November. After starting the year very strongly compared to shares, listed property has given back most of its early gains to have returned only around 8.6% for the last 12 months.
Global listed property fell in November, by 3.6%, reducing returns to 8.9% for the last 12 months and on a par with Australian property but are now looking far more overvalued than Australian shares.
Global infrastructure also fell in November, but still enjoys a very string 19.3% return for the last 12 months.
After a stellar 2012, 2013 was a very quiet year for Australian property trusts. After falls through the year the expected returns from these assets now look fair, with 10-year expected returns of around 7.7%pa from current levels. Gearing levels on average have fallen to 28% well below the 40-55% common before the GFC. This lower gearing is a lot better for averting disaster than the earlier levels, but the GFC experience suggests that 25% was the level above which disaster was assured.
Fixed interest and Cash
The RBA held cash rates at 2.5% again in December but more success in talking down the currency this month following the early December board meeting than in previous months, which has seen some welcome depreciation in the Australian dollar which is still considered to be 20-30% overvalued.
The US taper developments in the month saw a rise in bond yields to 2.75% for 10-year bonds, but they hinted strongly that interest should stay lower for longer. The Australian government bonds also rose with 10-year government bonds increasing to 4.17% in the month.
The UBS composite bond index, covering both government and corporate bonds in Australia, fell a marginal 0.18% in November to take 12-month returns down to 1.64% and below inflation. Corporate debt remains a better place to invest for those seeking income and willing to take on some risk.
One year Term Deposits remained unchanged below 4% in November, while three to five year deposits are still an attractive place to invest the secure-debt part of portfolios, compared to TD rates available in other countries or compared to the risks of capital loss faced in other debt assets.
For more specific help and guidance with your own investment strategy or asset selection, please don’t hesitate to contact Michael Rees-Evans CFP® in our office on 02 9299 7044 or by email at email@example.com
Important note: this information is based on opinions and information obtained from various sources deemed reliable, especially 1AMP Capital and van Eyk Research, with graphs sourced from Bloomberg and van Eyk. However, it is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any investment decisions based on the contents you should obtain professional advice.