With the Australian equity market expected to remain lackluster in 2016, investors may need to look off-market to generate sufficient returns, said David Bryant CEO of Australian Unity Investments.
“It’s been a fairly flat year on equity markets with not much to show over the past 12 months. All indications are we are in for more of the same in 2016.
“Recently Reserve Bank governor Glen Stephens hosed down expectations around how much our local economy will grow. In this environment the focus of investors will increasingly be on how to generate yield.
“With low commodity prices and less demand out of China it is fairly safe to assume that we’re not going to have an outstanding year for growth. Therefore, we can expect Australian equity returns to be muted in 2016.
“Investors are going to have to turn their minds to other sources of yield. This is especially pertinent given the outlook for interest rates.
“Even if we don’t see any cuts from the Reserve Bank in 2016 we certainly do not expect to see any increases. In fact, it is still quite possible there may be one or two rate cuts ahead for Australia.
“However, it is more than likely that the US Federal Reserve will finally begin its long awaited move on interest rates, and we may see a US rate rise as early as mid December.
“It could be argued that the Fed can wait a little bit longer before they move on the first increase, but with markets crying out for direction on when the rate rises will start, how much they will increase by, and what the Fed’s plans are for 2016, it is possible it will move sooner.
“When this happens we will see a lot of things recalibrate. We can expect some short-term volatility once the interest rate increases start, but it will be the commentary from the Fed that will be critical in setting the path for the next year.”
Locally, interest rate rises in the US mean a lower $A, Mr Bryant said.
“As the US increases interest rates, the $A will inevitably fall. Although it is sitting at around the low 70 cent mark now, realistically the $A will end 2016 at 65 or perhaps even 60 cents.”
This returns us to the question of investment returns in 2016, Mr Bryant says.
“Bank shares have always been a popular place to be invested. However, the banks will have some challenges in 2016.
“Bad debts are likely to increase and this, along with the Australian Prudential Regulation Authority (APRA) monitoring the level of home loan lending, as well as business conditions not expected to improve markedly, means we are unlikely to see see a lot of growth coming through in bank shares.
“This potentially leads investors to property – both listed and unlisted. In this market, the best value is likely to be found in unlisted property, where revaluations haven’t always kept pace with what is on market.
“This is unlike the case with listed property trusts, the majority of which are trading to a premium – in some cases quite a significant premium of up to 20 per cent.
“As well, listed property tends to rally along with equities and other interest bearing investments on market, so off market is likely where the opportunities will be in 2016.”
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Australian Unity Investments (AUI) is the funds management arm of financial services, health and retirement living services provider Australian Unity. AUI provides specialist mortgage, property, fixed interest and equity products to investors.
AUI’s investment approach is to use its established in-house expertise in property and mortgages while also forming joint ventures and strategic alliances with other specialist organisations.