FYI | Jan 20 2009
By Chris Shaw
Even though the Australian economy has to date proven to be more resilient than many others in the world in the face of the global economic slowdown, 2008 was still a year to forget for most investors.
Symon Parish, Russell Investment Management chief investment officer, Australasia, has proposed a set of key investment themes for the year ahead.
The first is that after the pain of last year there will be gains, as Parish expects the US economic recovery will eventually gain traction in the latter part of this year. Other developed economies will follow a bit later. He expects the key features of such an environment will be relatively benign inflation pressures, which is contrary to the view of many analysts at present. He also predicts modest increases to US Treasury yields and higher unemployment than has been the case in recent years.
In other words, he expects the US will see something of a jobless recovery rather than a full expansion, with growth taking longer to return to trend levels than has been the case in previous recoveries. Given Australia’s relatively better position, Parish expects any recession here to be milder than that experienced in other countries.
As is traditionally the case, given they are a leading indicator, Parish expects financial markets will recover before economies do. He goes so far as to suggest there are already some signs the market is beginning to price in early signs of an economic recovery. This trend should accelerate over the course of the year, in his view. This means investors should be in the market now, as sitting out this year could prove costly in terms of missed opportunities.
As Parish notes, cash was king last year, but he points out in downturns markets typically overreact. Last year was another case in point. This appears to be the case now, at least to the extent equities now seem to offer value compared to the lower returns available from cash following recent cuts to global interest rates. As risk aversion dissipates and investor confidence recovers, the attraction of cash will continue to fade, in his view.
Assuming an improvement in conditions over the course of the year, the market should reward stronger companies. This means investors taking prudent risks in investing in such companies will also be rewarded. Dividends should also play an important role, as Parish notes the dividend yield on the Australian market, as at the middle of this month, was around 6.5%. This puts it above the long-term bond yield for the first time since at least the late 1960s.
With market performance this year likely to be better than in 2008, Parish expects fund managers to also perform better. He thinks this will be due to a return to the market being driven by fundamentals rather than fear and greed as was the case in the latter stages of 2008.
Credit markets should also improve this year, as Parish expects the range of government measures should eventually create more favourable conditions. This means the balance of risk is to the upside in yield terms. As spreads tighten globally, as risk aversion reduces and the global economy recovers, Parish sees corporate credit as a primary beneficiary.
Having fallen from almost parity against the US dollar to something around US70c, the Australian dollar has returned to value territory, in Parish’s view. This implies there is scope for a rally at some point, as the market anticipates both an economic recovery and a recovery in commodity markets. With Australian investors getting paid to hedge given the interest rate differential between Australia and most other nations, Parish suggests investors should look to reinstate their normal levels of hedging in the currency.
With respect to a suitable approach, Parish suggests the most important thing for investors is to remain both diversified and disciplined, as while better times will come, it should be a bumpy road along the way. This means being patient will be important, as will be a long-term perspective given expected volatile conditions.
