Welcome to a new year

From mid-2013, we devoted a lot of time in our newsletters showing why the Australian dollar (AUD) will continue to fall with an ultimate ‘technical’ target price of 80 cents (June-July 2013 Views). As such, we had a lot of enquiries from clients asking whether they should increase their international weighting. For a lot of clients, where appropriate, their holdings in global shares were increased with either global direct shares and/or funds. That portion of their portfolio has certainly assisted in achieving strong returns over the past two years. Over 18 months later, we are almost at 80 cents. While we remain with the trend, we are taking a far more neutral stance on our call for global shares and a weaker AUD bias.

Over the past few years, we also rode the fixed interest and hybrids tailwind. We are now being a lot more selective on these as well while selling down many older positions.

With markets already showing plenty of volatility two weeks into the new year stemming from oil’s decline, we thought this is a good opportunity for us to begin the first newsletter of the year with a summary of some important issues we will need to focus on over the next 12 to 18 months and what these may mean for our expectations for 2015 and beyond. We also highlight some on-going trends we continue to selectively invest in, despite some economic headwinds we are likely to encounter. Nothing is certain in the investment markets but understanding some important issues may help to navigate around what we think will be a much tougher year for markets and performances.


  1. US interest rates – The important message here is that it is the change in expectations for future rate rises that will affect asset valuations, especially listed property prices, fixed income and utilities. We cannot tell you exactly when interest rates will rise but at the moment the second half of this year is the most likely period. As the year progresses, expectations will shift and the equity markets could suffer some sharper swings.
  2. China (commodities and property prices) – While Chinese property prices will be a topic of debate for some time, the gradual slowdown of economic growth in China is a known fact and so will a slowdown in demand for commodities, especially iron ore. This slowdown in demand will inevitably affect our market due to our market’s large weighting in resource stocks.
  3. Domestic growth and unemployment – With low rates set to continue, we cannot dismiss the continual rise in property loans and prices here. The important figure to follow is the unemployment rate. If this continues to trend upwards, we could see a tipping point when certain regions will begin to see more pressure in property prices, which will also hit consumer confidence, spending and growth. At the moment, we are not yet too concerned.
  4. Financial System Inquiry – This inquiry will likely push for a more conservative approach and our banks will be required to hold even more capital. With term deposits likely to fall further from the inquiry in order to lower funding costs, bank share prices may be supported in the near term as investors continue to search for yield. However, at the current valuation and expected tepid growth rate, returns from banks are also expected to be far more muted that what investors may have been used to in the past.

While our concerns have grown recently, we remain in the optimistic camp that a portfolio of solid companies and other thoughtfully diversified investments can hold their own this year, as long as earnings growth continue to be solid and barring any major negative unforeseen economic events. Nevertheless, the equity bull market is now almost six years old, and US equities in particular have
already enjoyed a significant re-rating, so any returns are likely to come from a rise in earnings rather than a broad rise in market valuations. Furthermore, a difficult and potentially hazardous process of “policy normalisation” by the US Federal Reserve is also likely to push volatility upwards. This is a marked divergence with the rest of the world, where monetary policy is still easy. This may mean the US dollar is likely to remain strong and may even strengthen over the course of the year.

We have also seen the search for yield continue. It’s important that we set the right expectation for the next couple of years. With rates at historical lows (and could even go lower), it is important to also adjust down expectation of returns in the future, especially for the fixed interest portion of your portfolio.

While we will become more selective on investments this year on valuation grounds, we remain positive on the longer term secular growth in healthcare and technology. We are also positive on some segments of the consumer staples and discretionary sector. The recent drop in oil prices should be also positive for consumer spending, supporting economic growth. It is uncertain how equities will perform by year end but one thing is more certain – get set for a much more volatile year. Keep some powder dry and stay patient for opportunities.





Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. Whilst every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice.

Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407