THE BIG PICTURE: Why investors have plenty of options

With another interest rate decision out of the way, it’s a good time to assess the state of play with investment returns. Of course while we can track current returns, investors always have to be forward looking and that requires a more detailed assessment of markets and judgment about where they are headed. In other words the old adage applies – past results may or may not be a good guide to future returns. Still, you have to have some base to make investment decisions, so it is useful to find out how returns are currently tracking.

In terms of cash-based investments, the official cash rate stands at 4.50%, and both 90-day bills and 10-year bond yields are around 5%. Historically those yields are still relatively low, but they are a darn sight higher than abroad. And investors can do pretty well on term deposits with some 6-month rates on offer as high as 6%. The Reserve Bank has warned that cash rates may well rise in coming months.

On the sharemarket, unfortunately the major indices have eased around 3% since the start of the year. And compared with a year ago, the ASX 200 has eased slightly. While that indicates a small capital loss, clearly that is only realised if you sell. And as always investors buy and sell shares every day, so the capital gain/loss situation will vary across stocks in a portfolio.

But while sharemarket capital gains or losses can vary substantially, dividends are generally more consistent, especially for blue-chip stocks such as banks. The current dividend yield on the broad All Ordinaries index stands at 3.8%, up from lows of 3.5% in January and just below the very long-run average of 4%. Investors must also take into account taxation when considering dividends on shares because in many cases the grossed up returns will be more attractive.

Clearly the Australian sharemarket is hostage to overseas developments, closely tracking the US market, but Australian companies are cashed up and poised to maintain or lift dividends.

Then there is residential property. Home prices have eased in recent months with national annual growth easing from 14% to 8%. CommSec expects that home prices will rise by 5-8% over the coming year. And with rental yields on units near 5%, total returns are clearly still healthy.

Overall it’s pretty clear that Australians are spoilt for choice, with investment assets still recording healthy growth rates – especially compared with what’s on offer in other parts of the globe.

The week ahead

There is a consistent flow of economic information for investors to digest in the coming week. There are no real highlights however with most focus now on the minutes of the last Reserve Bank Board meeting to be released on Tuesday week.

On Monday, data on housing finance is released together with credit card lending data from the Reserve Bank while the NAB business survey is issued on Tuesday. On Wednesday, consumer confidence, lending finance and private sector wealth figures will be issued while detailed employment figures for September are slated for release on Thursday.

New lending for housing showed some signs of life in July, with the number of loans up 1.7% from 9-year lows. CommSec expects that further improvement occurred in August with new lending lifting by 2pct in response to a period of more stable interest rates. If interest rates stay on hold for the remainder of the year we can expect a further recovery in housing demand.

The credit card data is worth watching also on Monday. Consumers are reluctant to go into debt, and if this trend continued into August we can expect further subdued growth in spending.

Little change is expected in either business activity or confidence when the NAB business survey results are issued on Tuesday. Just like consumers, business are cautious, preferring to ‘keep things simple’ until economic conditions become more predictable.

Again, consumer confidence should have been reasonably stable in October. People generally like a stronger currency as well as stable interest rates and more settled sharemarket conditions. But the global situation remains a worry.

Private sector wealth may have eased in the June quarter, with a weaker sharemarket offsetting stable house prices. But it should only be a temporary blip given the solid gains in the sharemarket over the September quarter.

And finally the lending finance data on Wednesday will reveal if there has been any change in the attitude to borrowing. Weak credit or lending growth was highlighted by the Reserve Bank in its latest decision to leave rate settings unchanged.

In the US, the main market-moving information is not released until late in the week. On Monday the Columbus Day holiday is observed. But while the bond market is closed, the sharemarket is open. On Tuesday, minutes of the September 21 Federal Reserve policymaking meeting are released. Clearly the interest will be in the debate on quantitative easing – whether the US economy needs more stimulus.

On Wednesday, data on import and export prices is released while the producer price index and trade data are slated for Thursday.

Producer prices (excluding food and energy) probably rose 0.1% in September. While clearly a modest rise, it will actually lead to a lift in the annual rate from 1.3% to 1.5%, thus easing concerns about deflation. The consumer price index should show a similar 0.1% lift in the core rate when it is released on Friday, leaving annual growth at 0.9%. Consumer sentiment and the Empire State index are also issued on Friday.

The other major interest in the coming week is a spattering of Chinese economic data. Figures on property prices are actually slated for October 10, while trade and money supply figures are currently targeted for Wednesday.

Sharemarket

The US earnings (profit reporting) season cranks up a notch in the coming week but it doesn’t get into full gear until the following week. Amongst the companies worth watching are Intel (Tuesday), JP Morgan Chase and Domino’s Pizza (Wednesday), Safeway, Advanced Micro Devices and Google (Thursday) and Charles Schwab and General Electric on Friday. Overall Thomson Reuters predicts that Standard and Poor’s 500 companies will lift earnings by 24% on a year ago while revenue will only grow by 7%.

Interest rates, currencies & commodities

The Aussie dollar has hit a 27½-year high of US98.94c. Parity with the greenback last occurred on July 28 1982. To provide some perspective, it is also worth noting that the all-time low for the Aussie was US47.73 cents set in April 2001. At that time Australia was considered an old economy, not possessing the technology companies that were seen as essential to be successful in the ‘new world order’. And while the Aussie is currently nearing parity, the gains certainly haven’t been recorded overnight. Over the past three years the Aussie has averaged almost US85 cents, well above the long-term average of US71 cents.

While the Aussie has been at these levels before and missed parity with the greenback, there are good reasons now for people to prepare their ‘parity parties’. The US dollar has fallen from favour with the Federal Reserve poised to provide more stimulus. At the same time, Australian interest rates are high, and set to go higher, commodity prices are rising and our No.1 export partner, China, remains in strong shape. While our currency strategists tipped parity with the greenback in the New Year, the forecast clearly may be realised earlier.

Craig James is chief economist at CommSec.