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:
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.