After the last RBA’s meeting, the cash rate has been cut again to a historical low point due to the slow economic growth in Australia. Overseas, Europe still remains in stagnation, the Chinese economy has shown a cyclical slowdown and the US economy is strengthening being reflected by the increase in share prices, property market and corporate profits. Under such a situation, how should investors set their long-term asset allocation?
Asset allocation means investors to create a portfolio with different asset classes including domestic shares, bonds, cash bills, property and international shares, which reflects investors expected return and their risk tolerance based on a long-term target. People who are more risk-averse would put a larger portion on low-risk assets like bond and bills while those who can tolerate high risk would heavily invest in shares.
In recent years, as yields fell, bond generated strong capital gains shielding investors from the worst share market. However, it is important to realise that bond yields are too low to fall further, so investors should not expect high returns in near future and they should also reduce their exposure to higher-yielding bonds which will increase portfolio risk and volatility.
Investors generally invest in real estate in two ways, either in property or Australian real estate investment trusts (A-REITs). Residential property investments give low yields, typically about 3% compared with 5-6% for shares, so investors are dependent on capital gains. Australian property had experienced exponential growth over the past 15 years up to 2010. Experts expect that the rental yields will remain fairly low in the next 5-10 years and property prices will rise in line with inflation. They also predict that investors will gain modest returns from REITs, below shares but higher than bonds.
The Australian share market has been quite volatile post-GFC due to uncertain domestic and overseas economic conditions. Yield-hunting investors have put up the price of banks, telecommunications and other high-dividend stocks while mining stocks have underperformed due to the concerns over China. With the strengthening of the U.S. economy and the depreciation of the Australian dollar, experts suggest investors target Australian stocks with US exposure.
For overseas stocks, the US share market looks optimistic, given the recovering of the US economy and housing market. There are also companies in Asia with strong growth potential such as Samsung which has had a great success with its smartphones that is very competitive to Apple’s product. Even though the Chinese economy is slowing down overall, there are still good opportunities. “As China is at the early stages of becoming a research centre globally for research into drugs and the raw materials going into drugs, it has a great test market with the scale to do a lot of drug testing.” One expert from portfolio manager of the Fidelity Asia Fund suggested.
In conclusion, investors are recommended to optimise their asset allocation according to long-term target and revise and rebalance the portfolio as market moves.