The pace of change brings many challenges to day to day investment activity, and we draw upon the resources of our broad network of economic experts and global and domestic investment specialists to ultimately determine a view as to what decisions are made.
At this time, we have set out below our main take outs of all the information available to us which result in the following views and practical decisions.
Australia will be economically challenged as a result of its reliance on tourism, education and immigration. These sectors will take time to recover. It is expected that unemployment will reach around 10%, which in turn affects spending and both consumer and investor sentiment.
Australia’s net debt is likely to jump by more than $500 Billion as a result of the stimulus packages unleashed and for the next six months, the Federal Government will be paying the equivalent of half of the country’s total wage bill to prevent over a million workers losing their jobs. Whilst Australia’s debt will remain moderate relative to other countries, our lack of diversity in income, and hit to our major earnings sectors will challenge our ability to recover at the same pace as other countries.
Our manufacturing industry has been largely decimated over the last few decades, and we will again be forced to fall back on our mainstay – our ability to export high quality mineral resources around the world.
As a result, from an asset allocation, we will:
- continue to favour global shares over domestic shares over the medium term, as economies like the USA and Germany, as examples, will find it easier to stimulate their economies through manufacturing activity, and further financial stimulus
- maintain material weightings towards defensive investments such as gold and infrastructure
- continue to move towards higher grade credit quality in the fixed interest sector
- maintain an exposure to listed property trusts, based on recent changes we have made in reducing exposure to retail assets and increasing exposure to industrial assets
- keep a watch on the $A and actively monitor decisions concerning the hedging position that we put in place for our International exposure. The movement of the $A against the $USD will depend on many factors but a mixture of both hedged and unhedged positions will remain our current position, but will be proactively managed as trends emerge
Secondly, in our analysis of Australian shares, we remain focused on:
- high quality companies with strong balance sheets
- a preference towards companies generating offshore earnings
- an underweight position to banks and financials that will bear the brunt of economic headwinds such as rising bad and doubtful debts, contracting margins, lower investment activity, and the risk of falling house prices
- a higher exposure to defensive companies such as utilities whose income is more defensive in nature
We will continue to monitor all the economic information available to us and manage portfolios proactively in accordance with our conclusions.
Please feel free to contact us should you wish to discuss any issues in relation to your specific circumstances.
James Mirams, Paradigm Group – Director & Senior Advisor