Where to invest in 2010
Published in the Herald Sun, December 2009
SUPERANNUATION
Katrina Barrymore
SUPERANNUATION is on track to finish the year with a strong performance and 2010 is shaping up to be just as good.
Double-digit returns in 2009 for most balanced super funds will help claw back some of the 20 per cent plus losses of last year.
And that momentum is set to continue, with average returns of around 11 per cent next year, according to AMP economist and investment strategist Shane Oliver.
But, as with all super fund performances, it depends on your choice and where you put your money as to how much above or below the "average" return you achieve.
The biggest influence on the average super fund is share market performance, so the outlook for shares will have a large impact on most super funds.
Shares
Despite the high risk and recent losses, most advisers will recommend you choose an investment option with a significant exposure to shares.
Typically a balanced fund allocates about 50-55 per cent of its money to the share market. About 30 per cent are local Australian shares and 25 per cent international.
Alternatives
These so-called alternative assets have become so mainstream they are no longer that alternative. They include infrastructure, private equity and hedge funds.
Hedge funds and private equity are the riskiest aspect of this group, however, they have typically been behind some of the highest super fund results.
According to research group SuperRatings, industry funds typically invest up to 20 per cent in alternative assets, while retail master trusts only spend about 6 per cent.
Because most of these assets are unlisted they are not given a daily price by the market, so the value can be less volatile.
"Alternatives will probably have the biggest influence on how funds will perform next year," Super- Ratings analyst Nathan McPhee said.
"There are some people who think the lag in valuations will still see another 5 or 10 percent fall but others say the revaluations have been fully priced in and they are on the way backup," Mr Phee said.
Cash
Many people switched their investment choice to cash during the past 12 to 18 months, as super funds were whacked by share market losses. While cash is a traditional safe haven, it also offers one of the lowest investment returns.
According to AMP's Shane Oliver, cash returns during 2010 will remain "unattractive" at about 4.5 per cent next year.
According to SuperRatings, the average balanced fund only has about 5 per cent in cash.
Fixed interest
Fixed interest includes longer term fixed interest agreements and corporate and government bonds.
"Government bond yields are likely to push higher later in the year, as monetary tightening starts to be factored in, but corporate debt is far more active with yields of 7.5 per cent or more," Dr Oliver forecasts.
Fixed interest makes up about 15 per cent of a balanced super fund.
Property
Another big asset class is commercial property through either listed or unlisted trusts.
Many trusts took a nosedive during the year; however the sector is now expected to consolidate after its dramatic shakeout.
According to Dr Oliver, the unlisted property sector will be back into positive territory with rental returns of about 7 per cent as well as some "modest" capital growth.
However, listed property trusts are set to zoom ahead. The economist forecasts returns of about 20 per cent next year, returning this sector to among the best performers for 2010.
The average balanced fund allocates about 10 per cent of its money to the property sector, SuperRatings said.
RESIDENTIAL
Nicole Lindsay
GO NORTH and then further north, say the pundits. Or down to the deep south.
Residential investment analysts agree on very little for next year.
Melbourne's inner and middle northern suburbs still show promise, as does Frankston.
But one investment veteran, Portfolio's Jock Bing, says Sydney's inner suburbs offer a better investment than Melbourne.
Managing director of Portfolio Property Management, Mr Bing says his investments must conform to a strict criteria and, while Melbourne doesn't meet it, Frankston does.
"We want to see something like 5 per cent growth - and that's almost impossible at the moment. You can do it in Sydney, but not Melbourne," Mr Bing says.
Prices for inner suburban houses - for instance, Brunswick in Melbourne and Newtown in Sydney – have "reached parity", he says.
However, the rents are still about 20 per cent higher in Sydney than Melbourne, which gives investors a better annual return on their investment, he says.
"Properties in Newtown should be selling 30 per cent higher than Brunswick, but the Sydney market hasn't moved in the last three to four years.
"The other residential market which is under-valued but still commands high rents is Frankston, where a house can be bought for $350,000.
"The rental market is as tight as it’s ever been and is likely to remain this way for the next two to three years."
However, there are other parts of Melbourne where property pundits reckon you can buy a house or flat and see a return on your investment.
Wakelin Advisory director Paul Nugent also has identified the inner and middle-ring northern suburbs, from Northcote to Preston, as good areas to buy, with strong potential for both capital growth and good renting.
He sees the big $1 million-plus family homes in the eastern suburbs returning to high demand next year.
"All the people who were planning to upgrade last year, but were put off by the global financial crisis, will come back into the market," Mr Nugent says.
While Charter Keck Cramer researcher Rob Papaleo also sees future growth in the inner northern suburbs, he identifies the outer suburbs, such as Sunshine and Fawkner, as potential winners.
However, he warned: "I don't think 2010 will be as cracking a year as 2009."
New apartments, which have not delivered good capital growth in the past, could improve next year because of a lack of stock. Banks have been loathe to lend money for apartment building, so very little has been built or is on the horizon.
COMMERCIAL PROPERTY
Nicole Lindsay
THE year 2009 has been the commercial property sector's annus horribilis, but will next year be any better?
The global financial crisis wiped an easy 20-25 per cent from the top end properties as debt-laden companies and institutions were forced to revalue and sell assets.
Australian Unity's head of property Martin Hession, who specialises in unlisted trusts, says the big unlisted and listed trusts have restructured their balance sheets and will probably start buying again next year.
Mr Hession sees "good growth in 2010" after the market "bottomed out" during the year and recommends trusts with a strong office component.
"There hasn't been much development in the last couple of years. Banks wouldn't lend to anyone to build so we didn't end up with an oversupply problem, but we might end up with an undersupply problem," Mr Hession says.
"I think competition will be fierce - 2010 will be an interesting year.
"With property you have to look at what's happening in three or four years' time - and it will probably be pretty good."
Mr Hession says that, if people are looking for growth, they should probably invest up to 15 per cent of their fund in property. But he stressed they should get qualified advice.
Directly owning property – buying a shop, office, factory unit or carpark - requires good management and a good healthy economy to keep them leased and returning income.
Charter Keck Cramer researcher Rob Papaleo is not enthusiastic about industrial and office units and carparks, but is keen on retail as it is relatively affordable and has room for capital growth.
"It's been a strong category of property during the GFC despite expectations that it would be impacted. It's fair to say that $1 million is the starting point.
Under $1 million, you are looking at secondary strips - and that's not necessarily a bad thing," he said.
The investment yields from emerging retail strips are better than the prime strips, like Puckle and Chapel streets.
"They don't represent good buying any more. We've been saying for a long time that there's good value in the secondary strips, especially if there's development opportunities on land out the back or above the shops – and especially along tram lines or train stations," Mr Papaleo said.
He nominated Brunswick St and going north up to St Georges Rd and High St, Northcote, as strips where there is still room for growth.
"There's also other pockets where there is infrastructure going on, like in Coburg, where the post office sold for $2 million recently. That was a very strong, very surprising result."
SHARES
THE Australian share market has weathered the economic downturn better than most markets around the world and it is expected to continue this strong performance next year.
However, the general rise in the market this year means that some sectors have been able to ride on the coattails of the upward flow and might not necessarily perform as well in 2010, when individual performance will be under the spotlight.
Investors will need to pick their sectors very carefully.
"Stick to specific sectors in 2010 because now that everything has rebounded the outlook for the general market is less certain," Wise-owl analyst Tim Morris said yesterday.
Gold
"I would focus on precious metals such as gold, including a number of junior emerging gold miners," Mr Morris said. "I'd be cautious about pure exploration companies. I like to see companies in production, so they are directly benefiting financially from the high gold price."
Some of the stocks expected to do well for investors next year are Saracen, which is about to come into Mining and Silver Lake Resources.
Technology
From the old-world gold market to the new-economy technology market, Australia's share market also has a few gems to offer in this sector.
"We're seeing a boom in demand for fibre high-speed internet as well as wireless internet as more people take up devices like i-phones and the like," Mr Morris said. "This is putting the internet in the hands of almost everyone, anywhere - and for internet service providers there is the potential for much higher revenues."
Companies in line to benefit from this include Amcom Telecommunications and Macquarie Telecom. Another company in the technology sector but with a slightly different business is Customers Ltd, which operates automatic teller machines, Mr Morris said.
Micro finance
The ongoing crunch from the financial crisis and sub-prime lending collapse has meant many lenders have deserted the more risky side of the loan market - "no one wants to engage in risky lending any more", Mr Morris said.
However, one company listed in Australia is Cash Converters. It is gold production, Avoca, Medusa mainly known for second-hand goods, but it makes most of its profit through short-term personal loans.
"Despite the meltdown they have had no increase in default rates throughout the crisis," Mr Morris said. "With effectively no competition in this market, they're very well positioned to become the dominant supplier."
Resources
Wealth Within founder Dale Gillham said strong demand for gold, oil and iron ore next year will help lift companies in the resources sector.
Resources-related companies should also do well.
"WorleyParsons is not a mining company but it services the sector and the increased demand by these companies for services will mean it will benefit from that," Mr Gillham said.
Health care
"This sector has been held back over the past 12 months," Mr Gilham said. "It hasn't performed anywhere near the rest of the market due to the very strong Australian dollar. Most of the revenue in this sector is from offshore, so the high Aussie has meant less revenue.
"CSL and Cochlear are two in particular that look set to show improvement. They are the latest companies in the sector- and they both have strong balance sheets and are very well-managed."