In Uncertain Times, Don’t Follow The Herd
In recent days, concerns about increasing government debt has come to the fore, battering both the Australian and global share markets. Contrary to the doom and gloom outlook reported in the media however, the world is not facing a major credit squeeze like it was in 2007. In fact, the current economy has presented a plethora of bargain investment opportunities for savvy Australian investors both in property and stocks. The many wealth creation options available for the taking, should act as a stark reminder to weary investors that Australia remains the ‘lucky country.’
With China now the destination of 25% of Australian exports and Australia’s national debt-to-GDP ratio expected to peak at approximately 21% compared to 110% for the OECD peer group, the national economy is well positioned to weather the current economic storm. Reinforcing this is the continuing strength of the Australian dollar, which is now regarded as a safe-haven currency, as well as the Reserve Bank’s continuing expectation of a 3.75% to 4 % recovery by 2012.
Even if these figures prove optimistic, Australia is still expected to significantly outperform most other industrialised countries due to slower global growth and returns. The stall in industry growth should take the pressure off interest rate rises locally with the expectation that we may see a rate decrease in the coming months.
That is not to say that Australian’s won’t feel some investment pain in the short term. Lack of consumer confidence has caused household spending to weaken in anticipation of a down turn, which in cycle is fuelling the chance of a downtown from a slump in the retail sector. But this is no cause for investors to panic. Just as nobody jumps ship when the seas turn rough, market volatility will settle leaving those who waded out the storm high and dry.
Despite this outlook, alarmist claims have prompted a lot of Australian investors to become understandably concerned about the current health of both the global and local economy which has resulted in defensive herd-like behaviour. For the focused investor who is willing to resist the pack mentality there is considerable upside in current market conditions.
Investors can find cause for optimism in their longer term convictions and look for the opportunity therein. Many quality Australian companies have posted record profits and continued high demand for their products and services despite being downgraded. To best take advantage of share market bargains, investors should research stocks that pay good dividends, are currently trading under the average price-to-earnings ratio and scale well among reputable companies on the international ranking.
As a result of market volatility, stock market investors can pick up attractive shares at a lower rate and be paid fully franked dividends to watch their share price recover. In some cases, certain shares will offer a growth of 9% to 12%, over the coming months. To find bargains, investors should also look for stocks that are trading under their average price-to-earnings ratio. If 15 to 16 % PE ratio is the average, stocks trading around 10 % suggest a viable investment opportunity in the long term.
Rewards are also bountiful for investors who are considering investing in a stable but sluggish Australian property market. In certain regions of Australia property is listed at pre-2004 prices whilst rental demand remains strong. Chan & Naylor forecast that property investments in current market conditions could offer a healthy yield of 5% to 6% with long-term capital appreciation.
Despite a subdued property market flanked by falling house prices and lower than average clearance rates, investors should not confuse the traditional winter slow-down with the risk of an impending economic recession. The Australian property market continues to offer good prospects over the medium to long-term, safeguarding against future market volatility and increasing the likelihood of capital gain and rental increases in the long-term.
The best way to avoid making fundamental and costly mistakes in the current environment is to remain calm and avoid knee jerk reactions. Unless you are a seasoned investor or financial professional, don’t rush to sell off stock. Wealth can only be made if you are in the market. What’s more important is having the right asset allocation, which is critical, and having the right mix relative to your risk tolerance.
General advice warning:
This information is of a general nature only and is not intended to represent investment or professional advice. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.