Part one
The flagging spirits of Australian investors were lifted towards the end of 2009 as the domestic economy and investment markets began showing signs of recovery.
However, while this development gave investors some welcome respite from the horrors of the preceding 18 months, most are still wondering if the recovery can be sustained.
So what do the economy and some of the main asset classes have in store for the year ahead?
IFA spoke with a number of investment and economic professionals about what the next 12 months will bring the market and its investment sectors.
The economy
AMP Capital Investors chief economist Shane Oliver says there is every reason to be optimistic about the domestic economy in 2010.
Oliver is anticipating a good year with improving levels of economic growth.
"Over the year ahead I think economic growth will pick up to around 4 per cent as stronger public spending hits the economy, housing construction picks up and stronger business confidence and higher profits feed through," he says.
In addition to these elements, he says he is expecting national income to receive a boost from higher export prices.
The increase in growth will in turn have a positive effect on the country's unemployment, he says.
"Four per cent growth would probably be enough to start pushing the unemployment rate back down. If it hasn't already peaked, I think unemployment is pretty close to the top and through the second half of next year I think will be heading back down probably to around 5.5 per cent," he says.
He is forecasting benign inflation over the next 12 months, but regardless of this fact he says he still believes interest rates will continue to climb.
"With growth continuing to pick up and unemployment falling, I think the Reserve Bank will continue to tap on the brake and at the end of the year we'll probably be looking at a cash rate of around 5 per cent," he says.
The Australian dollar is also set to strengthen in the coming year by Oliver's calculations.
"I'm looking for the Australian dollar to go higher and through parity. I'd say we'll be through parity by the middle of the year. It's hard to put a level on it but I'm expecting it to be at around US$1.05 at the end of the year," he says.
"The main driver there is our interest rates rising relative to US rates and I don't see the US raising rates until the middle of next year at the earliest and possibly not until the end of the year.
"With the Reserve Bank continuing to raise the interest rates here the gap will widen and this plus further strength in commodity prices I think will see the Australian dollar push through parity."
However, he warns one of the themes to be aware of globally will be the reduction of fiscal stimuli by governments in every part of the world and the flow-on effects thereof.
Australian equities
The Australian equities market rallied encouragingly at the end of 2009 and while it has tended to plateau since the high point in October, Platypus chief investment officer Don Williams believes the recovery will be sustained into the early part of 2010.
"If Christmas spending is okay, then I think the market will continue to rally in January led by the retailers and then of course we get into reporting season. We're likely to see a slowdown going into reporting season as these are usually a bit choppy and I don't see this February being any different. In terms of the local market you'll have to make a reassessment based around what companies are reporting and what their outlook is like," Williams says.
In regard to specific sectors, he says he thinks mining stocks are going to be the strong performers over the next few months.
"They really got left behind in terms of the rally from the middle of the year and the outlook for commodity prices and commodity stocks have improved from that period as the global recovery gains some momentum and China continues to go from strength to strength, so there are good fundamental reasons to believe all the mining stocks can perform well over the next quarter," he says.
Williams is also upbeat about the manufacturing sector over the next 12 months due to the self-sustaining nature of the recovery being experienced locally.
"Essentially I think if the Reserve Bank's view on the economy plays out then the manufacturing sector will have a much better year in 2010 than it did in 2008 or 2009," he says.
He says the change in interest rates is something to watch out for and in particular its effect on consumer confidence. "Getting rates from 3 per cent back to 5 per cent, and let's say it takes 12 months, we're not sure what impact that will have on the consumer sector or the housing sector," he says.
International equities
The Australian equities market was not the only one to experience a rebound in the back half of 2009.
Axa Australia chief investment officer Mark Dutton says this rally has also been experienced overseas and has been at least as impressive as the Australian market recovery and probably across a greater number of sectors.
However, domestic investors have not been able to reap the benefits of this situation so far, Dutton says.
"For Australian investors it's been camouflaged by the strong Australian dollar," he says.
"Going forward, the pent-up return which has not yet translated to Australian dollar returns can be unlocked at some stage when the local currency stops rising and maybe even steadies down and weakens off a bit."
He says the consistent rise of all markets is unlikely to continue in 2010 and any further price rises are likely to be more country specific as well as sector and stock specific.
While he is expecting a strong economic recovery in the US, he says this doesn't mean the best value investments will come from there.
"The ones that are lagging a bit in terms of economic recovery are the UK and Europe and they've got some good international companies that present better value in a lot of areas," he says.
In regard to specific sectors, Dutton highlighted consumer cyclicals as a strong performer in the new year.
Other sectors that might deliver strong returns over the next 12 months are financials and telecommunications, he says.
Property
The commercial property sector felt the full force of the global financial crisis, which was reflected by the real estate investment trust (REIT) sector in the past 18 months.
On a positive note, Pattersons Securities REIT analyst Jonathan Kriska says the bottom of the cycle has now been reached.
"Everyone's pretty much in agreeance that commercial values have pretty much bottomed. It means next reporting season will be the last reporting season where REITs will be downgrading the value of their portfolio," Kriska says.
However, this does not mean the outlook is entirely positive in 2010 for the REIT sector, he says.
"Some people say property prices will start rising now, but I think it's too early to say that given vacancy rates are still falling a bit and rental growth in some sectors is still going backwards," he says.
"It's very much linked to the speed of the economy and if you're a believer that we're on a massive V-shaped recovery with 4 or 5 per cent GDP (gross domestic product) growth next year, then you should believe commercial property will bounce back, but I don't believe that's the case."
The outlook for residential property next year is more positive in Kriska's view.
While the domestic residential property market has suffered during the downturn, unlike other countries, an oversupply never eventuated.
"We also happened to have a bit of a population boom recently, not only a baby boom but also had an immigration boom. So population growth in Australia is pretty good and that's making the problem of supply even worse," Kriska says.
"So economics 101 says if there is an undersupply, prices will go up. Of course, there will be a cap on that dictated by affordability," he says.
Fixed income
The global financial crisis forced the majority of investors to revisit the role of fixed income products in their portfolios and while the equity markets were performing poorly, the bond market experienced a new found popularity.
However, the outlook for the fixed income space is not looking as favourable for 2010 as it has been for the past 12 to 18 months, according to National Australia Bank Private Wealth chief investment officer Philip Kimball.
"An area we think that will offer very poor value relatively would be bonds outside of Australia. So global bonds say in the US, Europe and Japan we think that they are probably not a bad place to avoid in the next nine to 12 months or so," Kimball says.
"I think we've just ended the 20 to 25-year bull market in bonds and it's pretty hard to see where investors recover value in that asset class.
"We think that bonds offer very poor value at current levels despite a lot of the very supportive components such as the deflationary environment we're in, but we think these forces are likely to dissipate over the next 12 to 18 months, leading to a very poor outlook for bonds."
But not all people are pessimistic about the sector for the new year.
"I'd be cautious here, but depending on your skill and the profile of the fixed income investments, be it sovereign or credit or currency, you could expect a yield of between 5 and 9 per cent," Credit Agricole Asset Management Australia New Zealand country head Richard Borysiewicz says.
Emerging markets
As risk appetites increased through 2009, flows to emerging markets strengthened. But Aberdeen Asset Management senior investment specialist for global equities Stuart James says 2010 will be a more challenging year for the developing economies in regard to attracting investment dollars.
His view is based on the expectation that stimulus packages globally will be scaled back in the developed economies.
If the commercial sector does not effectively pick up where the stimulus packages leave off, resulting nervousness among investors could prompt a reactionary flight to quality back to developed markets thus depriving emerging markets of a significant portion of their inflows.
"I think that really would present a great buying opportunity. Given the strength of emerging markets that would be an opportunity to have a look at allocating more money there," James says.
In terms of the countries offering the best investment prospects, he says it will come from those with a strong reliance on domestic consumption.
"Somewhere like India is a very domestically-driven economy. Only about 23 per cent of its GDP is export driven. So India could do particularly well," he says.
"Brazil is also becoming much more of a domestic story with more tax incentives to increase domestic demand. Also interest rates have been coming down so I think there is a long-term opportunity in Brazil."
Part two
Super in 2010: the industry view
With many signalling the end to one of the worst bear markets the industry has seen in recent times, financial services industry bodies are intent on retaining the lessons of the past. Julie May reports.
Superannuation balances copped a blow during the global financial crisis (GFC), creating genuine concern among industry bodies.
With super fast becoming one of, if not, the largest asset Australians might ever own, the future of super is at the top of many agendas.
Expectations are that pending parliamentary review recommendations into the financial services arena will revolutionise the industry.
However, industry bodies say they are already making improvements to ensure an even more robust Australian super system in the future.
FPA chief executive Jo-Anne Bloch says superannuation will no doubt be the subject of much debate and discussion going into 2010, with the first phase of the Cooper review due out this month, preliminary recommendations due in March/April and the final phase expected in June.
"The Cooper review into superannuation and Henry review into taxation are both still underway, but despite this, the industry is continuing to forge ahead with its own changes and wants to position itself so that it is well prepared for what is to come," Bloch says.
While commissions have not yet been ruled out completely, the FPA and the Investment and Financial Services Association (IFSA) have already moved to transition away from commissions relating to super, with the FPA moving to phase out commissions altogether.
The revised superannuation member charter announced by IFSA in November, which formally comes into effect on 1 July 2010, gives consumers for the first time the power to choose whether their financial planner receives a commission or not.
IFSA chief executive John Brogden says changes to the charter were designed to dispel consumer perceptions that retail funds are recommended by advisers only because they receive a commission.
"What we hope to do is to smash the perception of the hidden charge by putting it back into the hands of the consumer," Brogden says.
This means superannuation members who have a personal financial adviser will be asked to agree to both the amount and method of payment.
As part of the new reforms, super members will have online access to investment options, performance information and comparisons every quarter.
Brogden says the changes will create more transparent adviser remuneration models and IFSA plans to more aggressively promote the value of financial advice to consumers.
Association of Financial Advisers (AFA) chief executive Richard Klipin says the AFA also supports the charter.
"For too long industry funds have been taking cheap shots at retail funds and the financial planning industry," Klipin says.
Industry funds, which do not pay commissions, will now no longer be able to use imbedded conflicts of interest, which are inbuilt in commission-based super distribution through the advice system, as their point of difference.
"The charter will go a long way in ensuring Australians have trust in the advice system and the AFA is also content on creating greater awareness around the value financial planners provide clients," Klipin says.
Bloch says while the industry has already begun putting measures in place to create a better super industry, the industry still has high hopes for what recommendations will come out of the reviews.
"There really needs to be a common disclosure regime among the different super sectors," she says.
"We need to be able to compare fees across sectors, ensure there is good strong governance across all sectors and that when it comes to financial planners and their clients that all sectors are well positioned to support financial planners.
"We want to demonstrate where there are imbalances so that we can get to the point where there is genuine competition across all sectors - public, corporate, industry, retail and SMSFs (self-managed superannuation funds).
"Industry funds for a long time have complained that financial planners don't work with them because industry funds don't pay commissions. Well, we've neutralised that now and commissions are already being phased out.
"We now need to ensure better cooperation and understanding between financial planners and industry funds, as well as funds right across the board."
She says a glossary of consistent terms would also assist the industry and the Australian Prudential Regulation Authority needed to refine super fund ratings to ensure it was not reporting on 'apples and oranges', which could be seen to be the case at the moment.
With many Australians' superannuation balances suffering greatly due to market turmoil in the past couple of years, everyone is conscious of the need to restore confidence in the sector to ensure super fund members are not spooked by pending review recommendations, she says.
"Announcements that came out of this year's budget were a bit of a shock, so whatever recommendations come out of these reviews, the industry must be mindful to properly explain changes clearly so that they don't undermine confidence any further," she says.
Commenting on the issue, Klipin says: "The issues that arose as a result of the GFC, Australia's ageing population and calls for the super guarantee to be increased from 9 to 12 per cent will all play a role in setting the landscape for super in 2010.
"It is still early days in thinking what might come out of the Cooper review, but the fact the committee will be looking not just five years out but 25 years out is pleasing.
"Reviews will give a good perspective on the long-term view of super in regards to pricing and infrastructure, scale of funds under advice, the incorporation of insurance and so on."
He says calls to increase the super guarantee are also justified because super balances are currently falling short and people in retirement need active choices so they can fund the type of retirement they want to have.
With super currently the second largest asset most Australians have, it is important the industry supports consumer education so people become more active in their superannuation decisions, he says.
Regardless of changes to come, a key factor is that the industry works together, Association of Superannuation Funds of Australia chief executive Pauline Vamos says.
"Our first challenge and indeed a necessity is to move to an electronic interface," Vamos says.
"There's no use in having choice of fund if a member can't compare funds and investment performance easily. People should also be able to roll over their money, transfer and find their money safely in an electronic and efficient way. We must nail this and nail it quickly."
IFSA would also like to see proper portability of superannuation funds in order to help Australians consolidate their super accounts, Brogden says.
"Currently on average every Australian has three super accounts, each which accumulates its own set of fees. This isn't done by choice but rather complications in the system whereby consolidating funds isn't a quick and simple task," he says.
Vamos says if the industry wants to achieve this, it must unite.
"We need an industry-wide solution and we must move past the vested interests that are stopping us from moving in this direction," she says.
"We must also ask our asset consultants and our fund managers fundamental questions and make them accountable. We must be able to set our investment policy statements in line with our members' needs and make those that do the investing on our behalf accountable.
"Finally we need to look at super as a whole-of-life product. We must look at managing longevity risk at the beginning of our super journey, not just at the end."
Vamos says she expects the reviews to deliver an industry in 2020 that can function electronically, that is comparable and that is made accountable for its investment decisions.
"If we get those three I'll be happy," she says.
"I would also like to see contribution caps revised as they have impacted people, mainly women over 45. The cookie-cutter approach cannot work. The government needs to recognise that and allow those who need to catch up to do so when they can."
Constant tinkering with the system puts people's plans into disarray and this forces many people to plan for their retirement outside of the super system, she says.
Self-Managed Super Fund Professionals' Association of Australia chief executive Andrea Slattery says her hopes for superannuation in 2010 are that more people become aware of the SMSF sector.
"It is one of the best-performing sectors in super, with one of the best rates of returns and the lowest fees, and I hope the reviews provide an avenue by which there is a better and broader understanding of the SMSF sector," Slattery says.
"In terms of what we want, and this might come as a surprise, we don't believe there should be a minimum account balance nor compulsory trustee education or any such barriers that might prevent someone from establishing an SMSF. We do, however, support trustees to improve their knowledge of superannuation and to seek advice."
One of the most important things for the SMSF sector is that more advisers become specialists so that they can help inform SMSF clients and help to assist the sector to grow with integrity, she says.
"We will be launching a marketing campaign targeted at consumers to help them understand there are professional SMSF specialist advisers out there and we've also got a new membership category, which will include a mentoring program, set to launch mid next year," she says.
"Through this, advisers can work in an organisation under a specialist SMSF mentor to help them get the skills and educational opportunities they need."
Super is the main savings vehicle for Australians, so it is important recommendations are in support of that and the industry works together, she says.
Some say the introduction of intra-fund advice in July 2009, which saw legislative relief given to superannuation trustees when providing limited personal advice to fund members, will continue, but it will be a debated topic in 2010.
Intra-fund advice has created an unlevel playing field in the industry as the ruling removes the criminal liability provisions for super trustees around providing personal advice for a limited set of circumstances, Klipin says. Those provisions still apply for financial planners, he says.
Bloch says the FPA is working with ASIC to improve regulatory guidance and the possibility of whether financial planners should get the same relief, however, both are ongoing debates.
Whatever may come from the recommendations and the future of super post 2009, the industry is clearly intent on working together to make Australia's already world-class super system even more robust for the future and, in particular, super fund members.
