© PPA Articles — www.propertyplanning.com.au.
Reproduced with permission.
At this time of year when we are back in the swing of working life, it is timely to consider our future financial and property planning strategy. To do so it makes sense to reflect on the year that was and what we may expect in 2012 both personally and within the greater economy. 2011 was a tumultuous year in the end, marked by many world events affecting global economics. Everything from catastrophic floods in Queensland that saw their economy slip backwards, a Tsunami and nuclear disaster negatively impacting Japans already fragile economy and of greatest uncertainty to global economic growth, sovereign debt concerns confronting particularly the US and Europe and the risk this lends to a potential global recession.
In context of the Australian economy we appear to be well placed to travel through this period of uncertainty. Australia’s reliance on the US and Europe has reduced steadily over the past 20 years and we are now far more reliant for trade on China and India which are both growing strongly and are widely tipped to continue growing. Fortunately neither of these countries are suffering under the significant debt clouds that are negatively impacting most of the western world and it is their appetite for our resources in particular that is one of the largest supports to the Australian economy in the short term. Coupled with this Australia is in the fortunate position that the Reserve Bank of Australia has quite a bit of room to adjust its monetary policy downwards, by reducing interest rates, which in turn has the effect of improving cash flow for those of us with debt. This in turn is ultimately likely to support property prices also, along with the projected steady population growth and considering recent weakness represents buying opportunities in some areas of the property market. OECD Forecasts released at the end of 2011 predicted that Australia would have the fastest growth in the developed world in 2012 equalled only by China.
In share market terms, in Australia the market is trading on a Price Earnings multiple of around 10 – 11 x earnings against a historical average of 14.5 times (the measure of corporate profitability against a share price), which are low relative to the norm. This means that as long as companies can maintain profitability in line with forward projections, the market is inexpensive and has room to grow. The risk here is that if corporate profits reduce due to a sustained global slowdown this measure of value will be revised. Some further positives are that in terms of where the market is in the cycle, a lot of the losses are behind us. The market index is still off its high of 2007 by more than 35% and while market valuation as a measure is not as simple as this, it does provide a clear indicator of where the we are in the cycle. Coupled with this dividend yields are high at approximately 5% on average of the ASX 200 and this provides a support to the market, while also adding directly to returns over and above any increase in the share price that can be achieved from share based investments.
Are you in a position to take advantage of these opportunities over the next 12 months?
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• Written by James McFall, Director & Financial Planner, Property Planning Australia with contribution from David Johnston, Director and Home Loan Planner, Property Planning Australia
