Latest News
| Upturn promises to earn returns David Potts The Age - January 29, 2012
A year of sharemarket volatility has left many stocks undervalued but with big dividends on offer, now's the time to buy. They're all coming out of the woodwork with grim forecasts for the global economy. World Bank, International Monetary Fund, Joe the barber - but the only prediction worth anything last year was that markets would be volatile, not that it was much practical help, save for feeling good about doing nothing.
Mind you, plenty of experts were tipping the sharemarket would rise, so being put off by predictions of more volatility probably did you a favour.
The market dropped 11 per cent, capping off its worst four years on a rolling average - which is to say comparing each month with its equivalent for the past four years - since the Depression.
So stick to cash, perhaps buy some government bonds since they're on a roll, stay away from shares because enough is enough and, for a bit of a thrill, maybe buy some gold, which has been a star, and you'll be right?
Afraid not. The best you could hope for, especially when you take tax into account, would be to tread water.
OK, so that's better than losing money and I know staying in cash worked a treat last year but funnily enough that's one of the best arguments against doing it again.
 Think of it this way. The better something does, and so the dearer it becomes, the closer it comes to the fine line of being overvalued.
Bonds are a great example. The prices of three-year maturities, for example, have been pushed so high you'd only get a yield of 3.3 per cent if you bought some tomorrow. Barring a global depression, they can't fall much further and are more likely to rise at some point.
It's the opposite for the sharemarket. Values are depressed and while there are bound to be more bad hair days there must be a bigger risk of missing the upturn - which can happen before you know it - than suffering even more drops.
In fact, things seem to be on the mend. The turning point was around October, just after commodity prices, especially gold, slumped. Typical.
Instead of a wink or a nod to get back in, markets prefer to trick you by veering off the other way just to frighten you.
This is not helped by the contradiction between forward-looking share prices and backward-counting economic statistics.
Anyway, share and commodity markets have picked up since October, some by double digits no less, almost certainly because they think - though could always be wrong, of course - that all the bad news about the global economy is already known.
Even Deloitte Access Economics's Chris Richardson, who refers to the European debt crisis as a potential "Eurogeddon", says "if the world muddles through this crisis, then Australia will grow faster than many think it will".
The big fear is that as the capital-starved European banks pull in their horns there'll be a credit squeeze in Asia as trade finance dries up, which would hurt us badly.
While you can't dismiss it, the world's central banks are determined to see that doesn't happen. Even the European Central Bank, which has taken a hands-off approach, has relented by offering cheap finance to the banks, which seems to be doing the trick.
The other sign of the tide turning is the rebound in the dollar.
When there's no confidence in the global outlook it drops.
The game plan
So, what's the right strategy for 2012?
Not sitting in cash, unless you know you'll need the money in a few months or you're saving for something for starters.
Otherwise you'll only be watching your returns fall or, at best, stagnate.
Worse, you'll be kicking yourself for missing better opportunities.
Nobody knows when the sharemarket will take off again and it's bound to be before an improvement in the economy is obvious, but there's no denying there are good stocks out there paying amazing dividends.
If you're getting a double-digit income from a stock and don't need to sell it in a hurry, it shouldn't matter if the price drops for a while.
Besides, the payouts on some blue-chip stocks are so high, with their 30 per cent tax credit from franking, that even if they cut their dividends by 20 per cent you'd still be getting a great yield.
As the accompanying table compiled by Dayton Way Financial shows, these yields start as high as 17 per cent with David Jones.
 True, retailers are doing it tough.
But were David Jones to cut its dividend 20 per cent, the yield would still be over 10 per cent. As it would be with a 40 per cent cut.
Compare that with a 5 per cent return on a decent length term deposit - or as little as 2.7 per cent after tax.
"Bond rates under 4 per cent are also unattractive. Even though these fixed-interest alternatives provide capital safety, income investors should consider switching into shares for the higher yield," Dayton Way Financial adviser, Tony Lewis, says.
When shares pick up you can cash in the capital gain and put more into bonds and term deposits which, by then, should be paying more.
After all, brokers say the market is under-valued and so there are good buying opportunities - but then they would.
Still, unless Australia is going into a recession there's no doubt the market is unusually cheap.
You can see that most clearly with the listed investment companies, known as LICs, which do nothing but invest in other shares, making them a bit like a managed fund.
Although many of them have been around longer than some of the companies they invest in, they're trading for less than their share portfolios are worth. The only reason their prices have drifted down so much is because nobody can be bothered.
Milton Corporation, established in 1938, has a share portfolio worth just over $16 a share yet the stock is trading just over $15.
For others the discount blows out to as much as 30 per cent - for 88¢ Contango Microcap gives you shares worth $1.22.
But you need to be patient because LICs can trade at a discount to their value for a long time for no good reason.
Also undervalued are real estate investment trusts (REITs, once called LPTs) with good yields as a result of trading below the value of their properties.
The difference is their dividends aren't franked and rather than the indifference meted out to LICs, the market is persecuting them for having borrowed too much.
But after slashing their debt and selling unprofitable properties, REITs are coming back into favour among fund managers.
Trim the weeds
Already have shares? Then you may need to rebalance. Since some stocks would have risen or fallen by more than the overall market, consider selling the good performers and buying more of the laggards or other stocks going cheap that might have caught your eye.
Then you're taking some profits and setting up other opportunities.
Whatever the market does it will be haphazard and erratic, so when buying it is safer to dollar-cost average, where you spend a fixed amount at regular intervals. The more the price rises the fewer shares you pick up.
That way you won't get caught paying too much at the wrong moment.
Investing internationally is a favourite theme of fund managers who, naturally, have global funds they can offer.
Frankly, the average global share fund has left a lot to be desired over the past decade. But the stars could finally be aligning for them.
Thanks to the debt crisis, European shares, gasp, are going cheap for starters.
And Asian emerging markets have been powering on, even shrugging off the dampener of the stronger dollar on returns.
Indeed some say the dollar is way overvalued, in which case we're getting offshore assets cheaply and, at some point when it drops, the returns in the local currency will look huge.
"The Australian dollar is now trading around 50 per cent above its fundamental value as characterised by purchasing-power parity measures of value,'' the director of capital markets at Russell Investment Group, Graham Harman, says. ''This may well prove to be as good a time for Australian asset owners to deploy some incremental spending power overseas, as it is for Australian tourists."
But whatever you do this year, know thyself when it comes to risk, which boils down to whether you'll be able to sleep, and set a time horizon that you're going to stick to.
Oh, and keep your fingers crossed.
| ||||||||||
