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Sep 10

A few thoughts on investment strategy for today

With the US heading towards recession and the Euro Sovereign Crisis getting ugly again where to invest one’s funds has never been tougher. Australian bonds yields are around 4%, meaning they are on PE ratio of 25 which compared to local and global shares, which are currently on forward PEs of around 10, are very expensive. Whilst shares are relatively better priced than bonds the additional volality makes them a challenging bet as downside certainly still exists.

My current thoughts around investment strategy are not so concerned with bonds versus shares but more around some style biases worth considering if you are looking to access each asset class.

Shares

  • I’m more inclined to favour “value” biased funds as growth stocks are currently gettng hammered if they don’t hit their numbers and they obviously have further to fall. The value style has a bias towards low PE or low Price/Book which certainly provides some downside protection in this market. The biggest risk to this bias is that alot of banks are probaly classified as value stocks but they are the ones most likely to suffer should the Euro Sovereign crisis develop into a Lehman Brothers’ type scenario
  • “Income” bias also appears a better bet. I personally like the Zurich Equity Income fund as it is typically much less volatile than the market but pays a very high income (it actually targets 10%pa in dividends). I’d certainly rather earn my returns from income than capital growth today.
  • In the Australian market I see one of the other big downside risks is in the small cap sector that may also be regarded as high growth and has a riskier exposure to commodities. Sure commodities appear to be good at the moment but their price increase has been so rapid that the downside in the face of a recession in the US is probably reasonably high. So underweight small cap in my book.

Fixed Interest

  • I definitely prefer Australian bonds than overseas. Whilst I’ve favoured Global Fixed interest funds in the past, with their high exposure to Italy and Spain it appears they have lost their defensive characteristics so I prefer active managers without too much exposure to the Euro sovereigns.
  • As opposed to 2008, I prefer diversified corporate credit (investment grade). The spreads are still quite wide and more than compensate for their default risk. Corporates around the world have been de-risking their balance sheets over the past few years and are relatively cashed up today so credit does appear good value.
  • Whilst the Australin government bond yield curve has dropped quite dramatically in the last couple of months the same can’t be said for term deposits. Whilst the term deposit interest rate has dropped it looks still quite attractive for any term up to 5 years….but be prepared to hunt around for a good deal…probably at a building society or credit union.

Its certainly a very tough investment environment today and next Saturday night I hope to do something a little more interesting than this!

 

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