The year ahead with Alan Kohler
Has Australia's golden run ended? After three years of beating the world by investing locally, is it time for investors to leave home? No, says Alan Kohler, publisher of independent investment newsletter, Eureka Report, and commentator with the ABC and John Fairfax. The Australian market is likely to keep producing good returns and to at least be a world-matcher, if not a world-beater (apart from the all-conquering Japanese sharemarket).
Not only that, there are three booms that have only just begun:
resources, aged care and the Internet.
2005 ended the big debate among professional investors as to whether it is time to start shifting money into 'international equities'.
In my view there is no reason to run away from Australia and scatter your money around the rest of the world via managed funds that incur a charge. Yes, on one hand, Australian shares have had a fabulous few years and many are not cheap. On the other hand you know the companies - you shop in their stores and you buy their products - you can buy them with Australian dollars and you get Australian dollars when you sell them. There would have to be an attractive proposition somewhere else to offset those advantages.
And anyway, the difference in prospects for Australian companies, according to analysts, is too small to get to concerned about. The average one year earnings forecast for Australian firms is currently 11.4%; for the rest of the world it is 12.8%. And that difference, small as it is, will probably be accounted for by changes in interest rates: markets have priced in steady rates in Australian in 2006 and a 0.35% average increase in rates elsewhere in the world.
In other words, there is little reason not to expect another year of Australian out-performance in 2006, because of strong earnings growth, stable interest rates and, probably, a weak currency.
The only caveat I would place on that is Japan. It is likely that the Japanese will be the best performing market in 2006 just as it was in 2005.
But where exactly should you focus your investing in Australia in 2006? Factors to keep in mind include the impact that management fees will have on potential returns and risk reduction through diversification. Here are my picks for the three booms that have only just begun:
1. Resources
Mining and energy companies are currently valued for a decline in commodity prices next year. The extent of those can be judged from a research note put out last week by UBS, in which the analyst keyed current spot prices for commodities into the firm's valuation model instead of 2006 forecasts.
As a result of doing the valuation, BHP Billiton changed from $18.61 to $43.86 (the price now is around $23.30); the valuation of Rio Tinto doubled from $51.21 to $109.51 (current price around $69); the valuation of Zinifex goes from $3.74 to $11.09 (current price around $6.80).
This indicates a key decision for an investor to make, is whether commodity prices will, indeed fall next year. Do you believe Marc Faber's (he's the legendary Hong Kong based investor) hypothesis that real commodity prices are around 200 year lows and have begun a long term uptrend, or do you think the boom is close to ending because the Chinese miracle can't last? Personally I think it can last and I'm with Marc Faber.
2. Aged care/reverse mortgages
My parents are moving into a retirement village owned by Primelife Corporation. It is a wonderful place – and hugely profitable for Primelife. After they bought a 49 year lease on a unit for $260,000; the company takes a monthly fee, plus a deferred fee of 25% of the original purchase price when the lease is onsold, plus 75% of any capital gain. Primelife is expanding rapidly and demand is strong. I have personally invested in FKP Property Group because of the quality of its management and the spread of its businesses.
These sort of retirement villages are part of a big trend that has only just begun: the spending by retired people of their children's inheritances. I don't mind my parents going into a deferred arrangement with Primelife Corporation because I want them to be happy and comfortable in their old age, and I know they will be. All of their friends are going into the same or similar villages. I'm sure most children in my position would feel the same. By buying shares in these type of companies, you are investing in the companies that will collect the money when our parents move into a nursing home or pass away.
And then there is health care, which will grow as more and more people move into the older age bracket.
3. The Internet
Six years ago it was thought that making money from the Internet would be easy: stocks boomed because they had a loose association with the Internet and little thought was applied to what was really happening.
We now have Internet Version 2.0. Online classified advertising is booming and so is online display advertising (banner ads on websites). This is the third boom that has only just begun.
The Packer and Murdoch families have positioned themselves for it by, among other things, by buying leading online classified advertising sites. (carpoint.com.au seek.com.au, realestate.com.au). Possible ways of positioning yourself may include following their lead into these companies; Seek Limited and Realeastate.com.au Limited or by buying their companies; Publishing & Broadcasting and News Corporation.
