Key investment lessons from 2016

Volatility has dominated global sharemarket headlines in 2016. From US Federal Reserve (Fed) plans to lift interest rates to calls that the global bond market may be nearing the end of a 35-year bull run, market confidence has been thin.

In Australia, markets have been kept on a tightrope with on going discussions about the potential of first home buyers being priced out of the market and speculation around policy moves for super and popular investment strategies like negative gearing. And although good investments were hard to come by, there were some opportunities available for discerning investors.

Australia’s love affair with property continues but investors overlooked commercial opportunities

The residential market, especially in Sydney and Melbourne, continued its strong growth, yet commercial property boasted yields well above the residential sector with attractive margins above cash rates. Some good buying opportunities may remain, but only where due diligence stacks up. With commercial property prices typically in the millions of dollars, only a few investors can afford to go directly to the vendor, but you may still be able to access this asset class via specialist funds that pool investors together to buy properties.

Small-caps disrupted the big end of town this year yet bonds lost their lustre

For the first time in four years, Australian small-cap shares (stocks with a relatively small market capitalisation) outperformed the S&P/ASX 200 Index (Australia’s leading sharemarket index). To put it into perspective, at the end of September, the ASX 200 was up six per cent (including dividends) while the Small Ords Index (the institutional benchmark for small-caps) had gained 16 per cent. This run sees some small-caps closing the year with quite high valuations, making opportunities harder to find and emphasising the warnings for investors picking next year’s stocks based on this year’s winners.

On the flipside, bonds may not be as safe as they once were. Many analysts are questioning if the 35-year bull market for bonds may be about to lose its puff, and as such, investors took stock of their exposure to this asset class. Bond prices are typically negatively correlated to interest rates and have benefited as rates around the world have approached record lows. The continued build-up around potential increases in US interest rates has created significant volatility for bond investors. If the US does raise rates, bonds may be in for a tough time if income received is considered insufficient to cushion potential capital losses.

Cash and gold were good alternatives in this low interest environment

Low interest rates drove greater demand for alternatives revealing that for many investors cash continues to be king. Gold was good insurance, offering some protection against market volatility through diversification, particularly for investors with a high proportion of risk assets in their portfolio (including a high weighting to equities). Direct exposure to physical gold rather than to gold-producing companies allows investors to avoid taking on operational risk and can be bought through exchange traded funds (ETFs) listed on the ASX.

With interest rates even lower than 12 months ago, we still advocate for the importance of maintaining cash within most portfolios. Despite the temptation to buy risky assets to generate income, our general recommendation is to keep a good cash reserve – in 2016, cash has allowed attentive investors to take advantage of good buying opportunities during market dips.

Brexit happened, so did Trump, but all the while Asia’s growth story continued

Brexit and the election of Donald Trump are the textbook definition of why geopolitical risks cannot be ignored when considering investments. With Brexit, the Australian sharemarket fell sharply after initial referendum results were announced, despite having limited direct impact on Australia. The ASX rebounded over the following weeks (and even quicker after the shock of Trump’s victory) but in both cases we are yet to see how the decision will play out in the long term. The impacts of global events such as these are difficult to avoid but broad diversification across regions and asset classes may help.

Among the global uncertainty, Asia (excluding Japan) recovered from a volatile start to the year, continuing to produce good levels of growth. Along with emerging market economies, Asia is trading on historically cheap valuations and although it is simpler than ever to access global markets through ETFs, do your homework and be selective with the investments and fund managers you choose. ETFs take everything – the good, the bad and the ugly. And although they charge a higher fee compared to an index or passive fund, consider a fund with an active local manager who can monitor companies.

Overarchingly, what we’ve learned in 2016 is to think global and do your homework

Its important to always look beyond the headlines, be thorough with due diligence, take a holistic view to decision-making and portfolio planning, and think globally – even if you are just investing in Australia. We also recommend regularly reviewing your risk levels and talking to a professional advisor about strategies and steps you can take to re-balance in a prudent way.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Nerida Cole

Managing Director, Head of Advice

Nerida is a highly experienced financial advisor with a specialisation in all aspects of superannuation including self managed super funds (SMSF), retirement planning and wealth-building strategies. Nerida is responsible for the training, development and mentoring of all of Dixon Advisory’s team of Financial Advisors Australia wide.

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