The past year was painful for investors in more ways than you might think, but tough times also bring increased opportunity.
The first myth exposed by the crisis was that governments don’t allow big banks to fail because it would be too damaging to the financial system. The US Government shattered that idea when it allowed Lehman Brothers to collapse last September.
Most commentators now say that event triggered the global credit crisis and went far beyond the damage caused by the failure of the sub-prime mortgage market. In turn, the economic wheels of entire developed nations ground to a halt.
But still investors had hope, clinging to the idea that somehow China could be de-coupled from the US economy, leaving the way clear for our resource boom to continue. China’s rapid slowdown disproved that theory a short time later.
It was a year that crushed the faith of investors in many things. Above all else, it proved that Australia is indeed part of a global investment market, and there is no escaping this reality.
Predictions about 2009 must be made in such context if they are to have any credence with weary investors.
The year has certainly begun with a refreshing candour by companies and governments. BHP Billiton has recently talked down the idea that China and other developing nations can save us.
So there are no quick fixes to the worldwide recession, just slow rebuilding.
While this is painful news, it is much better to begin 2009 with a realistic view. There should be no more false hopes; just a clear-headed review of the opportunities that do lie ahead. And make no mistake, there are opportunities aplenty. We ask Australian Unity’s head of investments, David Bryant, to share his views on what’s in store for the major asset classes in 2009.
Opportunities in equities
“It certainly has been a tough and challenging year for equities,” says David. “But there will be opportunities for long term investors who remain in the market.
“Locally, investors should be looking at investing in defensive sectors such as healthcare. Internationally, you should ensure you are investing in companies that can make it through these tough economic conditions.
“The key in finding such opportunities is old-fashioned research to make sure you are buying a good company from a distressed seller rather than shares in a distressed company.
"There is tremendous upside if you can distinguish between the two," says David.
Cash may not be king
David believes that investors now more than ever need to understand what 2009 holds for their investments in cash.
“As we all know, investors are still seeking safety and security, and many turned to cash and term deposits last year. But this safety comes at a price and investors are now seeing the returns from these products fall rapidly,” says David.
“It is unlikely that returns from cash will keep up with inflation in the nearer term, especially for tax-paying investors. Such investors will find the buying power of their capital will most likely go backwards.”
More interest in fixed interest
David says that as the cash rate continues to fall, many investors will be seeking higher yields and this is where fixed interest comes into play.
“In the current environment, quality fixed interest such as Commonwealth government bonds and ‘triple A’ rated products should continue to provide outstanding returns as bond issuers, even governments, increase their yields to attract investors,” says David.
Unlisted property geared for growth
“Listed Australian real estate investment trusts took a big hit last year, and as a result many investors are now moving to unlisted property” David says.
“Transparent, well-managed unlisted property trusts with moderate levels of gearing is where I would be putting my money right now. The greater the transparency around debt and the assets owned by the trust, the better.”
This transparency combined with falling interest rates, makes the yields from unlisted property trusts look all the more compelling
“2009 is shaping up to be a stellar year for funds that haven’t paid too much for their property acquisitions and have kept their gearing at conservative levels.”
Good news for mortgages
Despite having a few tough months, David believes that mortgages will do well in the current market.
“With term deposit returns declining significantly as interest rates decrease, mortgage funds that only invest in quality first mortgages will become more competitive.
“This will benefit many investors who are just trying to get back to basics. Besides providing consistent monthly income, mortgage funds offer capital stability and that extra bit of diversification, which should be an important consideration at the moment.”
MARCH 2009
