2014 ended up being a positive year for diversified investors but with a lot of volatility in the last quarter providing opportunities for clients with cash.
2015 is expected to see fair global growth, low inflation and easy monetary conditions, with Australia likely to cut interest rates next year with weak growth and poor confidence. This environment suggests shares and most growth assets should enjoy continued growth, but with higher volatility and the need for more patience since share prices depend on rising earnings.
Last December we included Shane Oliver’s forecast for 2014. The table below summarises how his forecast fared against actual returns for the year to November, before including his forecasts for the year ahead*, showing how difficult short term forecasts are and why we prefer 10 year forecasts in advice to clients. Our current 10 year forecast based on Farrelly’s Research are in the last column based on 9th December valuations and the ASX around 5250.
Source: AMP Capital, Lonsec, Morningstar, REIA, Thomson Reuters,* 2015 forecast by Shane Oliver (AMP Capital); 2014 actual is only 11 months to 30 November; ** 10y forecast by farrellys
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, desired outcomes and ten-year expected returns, while seeking to avoid buying assets that are fully valued and trying to top up on assets while they are cheap to fair value.
Australian fell 3.3% in November and continued to fall into December after a short rally, reducing 12 month returns to 4.3%. In early December with ASX All Ord at 5200 we expect 10-year returns of around 10.3% pa.
The small cap equity market fell 3.8% in November due to recent turbulence in commodity markets, taking 12 month returns to -1.8%.
The December correction has moved Australian shares back ‘cheap’ based on our tipping points (with expected 10-year returns around 10.3%pa) at the 5200 level in early December, providing a good opportunity for those still underweight the asset class to top up.
Global shares rose 5.5% in November in Australian dollars as European investors regained confidence after heavy selling in October combined with a depreciation in the Australian dollar taking 12 month returns to 17.1%.
Developed Markets, especially the US which represents around 60% of the world market, are nearing the top of the fair value range and are close to being fully priced, reducing expected 10-year returns to around the 6.6%pa mark after the US rallied 2.5% in November. Shares in China rallied strongly after an unexpected cut in interest rates.
Emerging Markets also recovered in November and were up 2.3% in Australian dollars, lifting 12 month returns to 8.4%. On current valuations emerging economies appear cheap for longer-term investors, with expected 10-year returns of around 9.3%pa from current levels, but with more expected price volatility than for developed markets.
Property and Infrastructure
Global listed property rose 2.7% in November, taking returns to 27.3% for the last 12 months due in large part to the depreciation of our dollar against the US dollar.
Fixed interest and Cash
The RBA held cash rates at 2.5% yet again in December and suggested the status quo for the immediate future and suggested the Australian dollar remained overvalue despite falling 3.6% against the US dollar in November. The prospect of rate cuts in 2015 received a fair amount of commentary in early December, providing welcome news for borrowers, but not those living off interest.
The UBS composite bond index, covering both government and corporate bonds in Australia, rose again in November up 1.3% to take 12-month returns up to 8.6%. Fall in commodity prices helped ease investors’ fears over inflation.
For more specific help and guidance with your own investment strategy or asset selection, please don’t hesitate to contact our office on 02 9299 7044.