2012 is going to be a mixed year, more certainties will come out in the global markets, but there are also more dangers coming out as well. For investors, diversification is the best strategy for 2012, which was a different strategy for 2011 where caution and sitting on cash were probably the best strategies for 2011.
Several investment analysts made a few comments this week towards some of the riskier assets you can consider. 2 of them were from Europe, which were Italian bonds and Spanish bonds, which had been downgraded in 2011 because of the economic situations.
However, they had rebounded particularly the Italian bonds after the new government sworn into power. The yield for Italian bonds had fallen significantly showing new confidence, at least for the time-being on the new government.
Historically speaking, bonds are supposedly to be safer than shares, but events happened in Europe had changed this. Bonds are becoming riskier assets in many cases, but smart investors had been benefiting from trading these bonds, where you can get good yield (above 5% or 6%) as well as quick profits on the market.
Of course, they remain as very risky as the future of European debt crisis remains uncertain – and in the worst case scenario, we will see a credit freeze where the market simply does not want these bonds anymore (junk bonds) as in the case of Greece, in which case, investors are set to lose almost every dollar.
But for investors, it is a good idea to include at least some investments in your portfolio. The best way, in my view, will be through ETFs that invest in European or Global bond markets, these are liquid investments which you can buy and sell on the market fairly easily; and give you exposures to different markets at different time-zones.
Direct Residential Properties
The supply situation of residential real estate market in Australia remains very tight, with limited new buildings being added to the market. However, demand is also much weaker in 2011. During the peak, you can see multiple bids on properties where buyers will bid on price over the reserve price, that is much very much a history now, and it takes weeks even months to sell a property now.
In another word, some investors may argue that this is the “Buyers’ Market”. This is the first time in many years where buyers have the opportunity to negotiate price with the sellers, which was impossible last few years.
With interest rate on the decline curve, buyers are able to secure more funding from the banks to purchase properties, so we may, hopefully start to see return of first home buyers back into the market again.
For investors, questions remain in affordability and investment returns on Australian properties. Investment returns remains very low especially on the rental yield side, although, rent has been increasing in Australia, and is likely to remain so as Australian property remains very expensive; but the current rental yield is still significantly lower than other assets such as term deposits or high yield stocks.
If you are buying for your first home, then that is a different scenario, we believe the current market is much better than 12 months ago when property market was clearly overpriced and probably over-geared; it should be a better market for first home buyers now.
The currencies market went through a turbulent time in 2011, but it was much more stabilized since November. Euro was the biggest loser in the market because of the uncertainties.
We had asked a few analysts about their thoughts, and here are some currencies worth looking, Australian dollar is excluded as it is considered as “base currency” for this analysis.
USD could be the surprise of the year. While the growth remains slow, it is an ongoing progress with falling unemployment rate and rising housing value the 2 driving factors. USD may bounce back strongly towards 2nd half of 2012 if it can continue on the current path.
At the current path, the unemployment rate could fall below 8% before the election, and if QE3 is not required, that will remove another obstacle for USD growth.
Furthermore, dismal growth in EUR and JPY will provide further reasons for growth in the USD as they are historically, competitors to the USD
EUR maybe the best or the worst performer for this year depending on the outcome of the ongoing discussions. Any major collapse of Greek economy could trigger a further meltdown of EUR, but any major resolution or collective agreements by European powers can boost the growth of EUR this year.
However, unlike US economy, growth in the EU Zone is expected to be very slow if not going backwards apart from Germany and France. Good growth, however are still in place for selective Euro Zone, including Germany, The Netherlands and parts of Eastern European economies.
The fundamental problem faced by Japanese economy is the ageing population and also constant changes in governments, it’s public debt is also the highest in the world. Japan has a very large economy, and it has been boosting exports to China and other Asian markets to offset the weakness in exporting to the US.
The outlook for JPY in 2012 is an interesting case, strong growth in China will help Japanese exporters, as well as renewed growth of US economy. It may perform better than 2011 as it was adversely impacted by the earthquake.
Rebuilding process is also on the way in Japan, the vast rebuilding process maybe a catalyst to Japan’s economy as it will require significant number of new equipment and materials; we may see a surprising upswing of growth in Japan’s economy in 2012.
Chinese Yuan (RMB) is a controlled currency, so it is very difficult to trade. With China continues to release signals of slowing economy, it is likely they will use this as an excuse not to appreciate its currency demanded by its trading partners.
Hong Kong dollar is an interesting currency to watch as it is paring to the economy growth in China. Many investors have kind of use Hong Kong Dollar as a trading currency into China’s economy growth.
Various Exchange Traded Funds (ETFs)
ETFs had gained popularity over the past 10 years, the evolution of ETFs was amazing especially over the past 3 years where investors can benefit from rising and falling markets easily through ETFs.
In today’s uncertain markets, investors can build a portfolio with different types of ETFs to capitalize opportunities and trends. For instance, 2 years ago, Gold ETFs and even Double Long Gold ETFs were exceptionally popular, some of these ETFs had grown by over 100% in profit. In an uncertain markets, investors switched to Short Selling ETFs or other hedged ETFs where they can invest in shares, commodities and also bond market.
If you are uncertain about individual stocks or bonds, I will suggest to consider various ETFs that are available on CFD or trading platforms, do not just look at ETFs available in Australia as the choice is very limited, but look at what else is available in North American markets especially when AUD is still trading above USD.
Domestic or International Markets
Should you continue to focus investing in the Australian market or should you invest more in international markets? This is a tough decision faced by many investors. Australia was lucky in the way that it was not really impacted as extensively as other markets during the recession, although it faces a variety of challenges on its own.
International markets, on the other hand, had been recovering strongly and had reported much better returns than the Australian sharemarket in 2011, because they were in the recovery mode, so a lot of companies were way oversold in the US and Europe in the past.
As a strategy, the best way is to diversify your investments according to their assets and their region.
Australian sharemarket is an excellent market for investors looking for good dividend yield, its banks, infrastructure companies even telecommunications and IT services companies provide excellent dividend yield for investors, which make them very unique investments to include in portfolio.
Naturally, investors should also choose resources and mining services companies in Australia as it is one of the top 3 mining capital markets (Canada and UK are the other 2 markets) with a lot of resources companies to choose from.
On the other hand, international markets offer many industries that are non-existent in Australia. Good growth industries expected for 2012 include social media, mobile / wireless Internet applications, cleantech, renewable energy and biomedical sectors.
Unfortunately, Australia does not have any company comparable to Facebook or LinkedIn, we do not have any sizable cleantech company listed on ASX, and we only have a very small handful of international biotechnology companies in Australia. So if you are looking for the high growth industries, you have to go to international markets for these opportunities.
My personal preferences for 2012 are: high technology and biotechnology sectors in USA, Latin American markets particularly Brazil and Peru, Canadian oil and gas industries (as they are finalizing the keystone project to connect pipelines between Canada and USA); Hong Kong market and Indian market.