Outlook 2006

Over the past decade Australia has been one of the best performing economies in the world.

It appears that 2006 will continue to show solid growth. Not spectacular but solid.

Last year the economy was restrained by the housing slump after the property boom. In the past a housing slump has usually been followed by a recession. Fortunately we have had the soft landing as predicted helped by the resource boom. Even though exports were weak in 2005, and we had a severe drought with high petrol prices, the economy remained ticking along.

In 2006 we should see improved export performance and a pick up of consumer spending toward the end of the year. Housing construction will bottom out this year and interest rates will remain as is with no reason for change. There may be a slight shot across the bow late in the year but generally there is no reason the current interest rate environment will change

The current resources boom is expected to continue but not at the same pace. This is due to continued demand from China, India and Japan.

The biggest winners from this boom have been the mining companies and the State Governments (via increased taxes) particularly Western Australia and Queensland which still has a strong property market

This boom has flow-on effects for the rest of the economy. As the Japanese proverb says, "a rising tide floats all ships". This means that the associated services have also benefited, lifting household income, stockbroking and investment banking.

International Economies

Last year the global economy grew at around 4%. This year the forecast is slightly less at 3.5-3.8%.

The US housing market is also coming off a boom which should result in a slow down. However US business and profits are strong which may encourage investors to switch to the sharemarket.

Europe has struggled for years, apart from Norway and Ireland, but 2006 looks like it will be a better year for Europe as a whole.

Japan has now moved to self-sustaining recovery and is off life support. The cross shareholding culture "keiretsu" of Japan is diminishing which means the market is less strangled. (Traditionally large Japanese companies have always had large cross shareholding in each other e.g. property companies and banks which meant if one sector performed badly it could bring down another.

This culture was also used as protection against aggressive takeovers) As domestic spending picks up we could see more confidence in the Japanese stock market which has come off over 80% from its previous highs some years ago. This means more households will invest. Currently Japan has one of the lowest levels of personal share ownership of the Western world. This should now begin to change with education and as Japan moves away from a low interest savings culture.

China continues to grow and will be a success story for many years to come. It is predicted to grow at 8% for 2006. (See previous newsletter.)

Where to Invest in 2006

Forget residential property unless you are in Queensland or Western Australia which is still strong at 5-8% p.a. These states are now at peak levels much the same as NSW 24 month ago. It is pretty obvious what will happen in those states over time .Well, obvious to anyone who doesn't actually live in those states.

Current yields on investment properties are around 3% which relates to an earnings multiple of 33 times, more than double the P/E of banks.

I am not advocating selling your castle but if you are renting, stay renting. Don't tie your capital in an asset that will probably decrease in value or that you could buy for the same price in 18 months time. Look for other assets that can be geared e.g. shares or managed funds and take advantage of the current markets

If you do have a love affair with property look to Listed Property Trusts (LPTs), which returned 12% last year compared to 23% for shares. BT predicts returns in 2006 of 8% for LPT's. Better than cash and the residential property market.

Australian shares still look good for 2006, but don't expect the same returns as 2005 (although we did say that at the beginning of last year). Some of the 'good news' is already priced into the market.

As I said last year, diversification is important, especially with international shares, if you are to get the best returns for 2006.

So if you have been sitting on the fence doing nothing for the past 2 years, you have missed out on 2 great years for the Aust. stock market. So perhaps the time may be now. Although if you have been sitting on the fence for the past 2 years chances are you will never do anything!

Don't forget you can be an investor for as little as $200 per month or $5000. The best thing you can do is be in the market. It's an exciting journey .... Jump on board!

Super Splitting

From January 1 2006 a new superannuation rule came into effect, called super splitting. (Most of the new rules have been in our favour recently.)

Super splitting allows you to split your superannuation contributions between you and your spouse. This is good news for couples where one does not work or where one has a significantly greater income than the other. There are now two Reason Benefit Limits (RBLs): a lump sum of $648,946 and a pension RBL of $1,297,896.

This means you can use the pension RBL if you take 50% of the benefits as an annuity or pension.

The advantage here of course is if you are near the maximum RBL additional contributions can be channelled to your spouse's super. Retirees will now have much more flexibility. This will result in increased tax benefits for both parties.

With the abolition of the 12.5% surcharge last year the new change makes superannuation a very tax effective and worthwhile retirement vehicle.

Outlook 2006 - Free Financial Advice for Australians

International Economies

Where to Invest in 2006

Super Splitting

Article originally published in February 2006.

Venn Williams - Halogen Pty Ltd