Building your wealth - BRIC by BRIC - Free Financial Advice for Australians

We should always be global investors to get the best returns from our portfolio. The new BRICs, or Brazil, Russia, India and China, are the fastest growing economies in the world today. The term 'BRIC' was first coined by the investment bank Goldman Sachs, and Morgan Stanley launched an MSCI BRIC Equity Index last year. There are now some BRIC managed funds available to invest in. So why the sudden focus on these four markets? Well, very simply put, these are the hottest markets on the planet. The Brazilian and Chinese ETFs are up close to 40% in the last six months, and if anything the recent rises in India and Russia have been even more spectacular. In the first quarter alone the MSCI BRIC Index rose 18.7%.

So let's have a look at a few positives in investing in BRIC countries.

Brazil: Has one of the largest base metal reserves and is one of the leaders in agricultural production.
Russia: Has 20% of the world's crude oil reserves and 35% of the natural gas reserves.
India: Leaders in IT with a highly skilled worker base with a massive population with increasing affluence.
China: Likely to be the world's largest economy by 2040 with massive and sustained growth up to 10% per annum currently being experienced.
The growth rate of the BRIC countries over the last 5 years has averaged 6% per annum compared to under 4% for the other G3 countries.

And here's what Goldman Sachs had to say in its report, called The Path to 2050, concerning the BRIC economies:

China's economy will surpass Germany's in the next few years, Japan by 2015, and the US by 2041.
India's growth rate will be the highest, not China's, and will overtake Japan, today the world's second largest economy, by 2032.
BRIC currencies could appreciate by over 300% over the next 50 years providing a big tailwind for investors in BRIC assets.
Taken together the BRIC could be larger than the US and developed economies of Europe within 40 years.
Over the next two decades BRICs will bring over 200 million people with incomes above US$15,000 into the world's economy, that's the combined populations of Germany, France and the UK.

For the first time in recent memory, BRICs are growing not by borrowing but by investing. China has the world's highest savings rate, Russia is sitting on huge foreign currency reserves thanks to windfalls from oil profits, even Brazil is seeing unusual unseen discipline by running a fiscal surplus.

Soaring commodity prices have put more money in BRICs' pockets than ever before, which means much less danger of financial meltdown like the ones Brazil and Russia had in the 1980s and 1990s.

And finally, higher credit ratings mean the BRIC today can issue debts in their own currencies. The result is a much more stable economic expansion and financing of investment that does not depend on the whims of foreign investors.

A lot can happen between now and 2041 and it's worth remembering that 50 years ago Japan and Germany had just been flattened after losing a world war, and 30 years ago large swathes of Korea was still rice fields, and even 10 years ago China was a mere blip on the world's economic radar screen.

But here's really the reality check: by these standards today, each BRIC country falls short on at least one measure. Potential problems with China's political uncertainty, India's choking bureaucracy and caste system, Brazil's history of policy flip-flops, and Russia's gangster capitalism.

Apart from some of these cautionary reasons, the BRIC countries offer some of the most exciting investment opportunities today on the planet, and investors can take advantage of this through managed funds. Some of the stocks make more money in a month than you can get out of the S&P over three years.

So in summary if you're moving forward the BRIC economies should be part of your ongoing portfolio. Most of us will find over the next few years you're superannuation funds will be offering investments in some of these growth areas so watch out for new menus on your superannuation fund and if BRICs become available you should consider putting some of your portfolio in this area.

Do holiday homes make good investments - where are you going this summer season?

As summer arrives and Christmas approaches, many of us start thinking of lazy beach days and trying to get away for at least a few days for some sun and surf, or even perhaps the bush. If you're anything like me, in a few days you'll find yourself looking in the window of the local real estate agency, checking out the prices and thinking, maybe even remotely, could I buy a holiday home here? The mind does get to wonder and you ask yourself all sorts of questions, the first one being is a holiday home a good investment? As a holiday home is a property, we need to look at what criteria we need to ensure a property investment is doing its job. We must achieve two key outcomes when investing in a property:

Steady long-term capital growth of around 6-9% per annum, and a consistent long-term annual income of say between 3 and 5%.

If we assess a holiday home against investment criteria we'll find that holiday destinations are very seasonal and these returns can often depend on things like the weather, for example no snow this year, rentals are down.

It's quite a luxury these days to purchase a holiday home and decide to keep it all for yourself, in other words, go there when you feel like it with no concern for renting it out to others to recoup some of your costs. As holiday homes are luxury purchases it makes them particularly sensitive to market downturns. When or if the economy tumbles investor confidence can also take a tumble, and holiday homes are usually high on the list of expendable items if owners are in financial difficulty. A forced sale can ultimately mean the prices fall and capital growth suffers.

Obviously there are exceptions to this rule, such as properties with terrific views or water frontages. There are significant maintenance costs involved when you rent out your holiday house, far more than if you had a normal residential property investment. Obviously holiday tenants like things to be exactly as they like it when they arrive, including all the amenities such as kitchen appliances, dvd players, tvs, household amenities etc, and the cost of maintaining these items to an acceptable level can sometimes be extremely expensive.

And of course the times you want to use your holiday home will probably be when everyone else does, in peak times, so if you're occupying the house obviously it can't be generating income for you so can't be considered a negatively geared investment. You may have difficulty convincing the ATO that your property is a genuine income producer to qualify for negative gearing.

Also, when you do let your holiday home out, a large proportion of your rental income will go on management fees, and while professional management agents generally charge a modest fee for managing standard residential tenancies the extra workload with the frequent tenancy turnover of holiday homes will be more expensive as new tenants will continuously need to be found, a lease drawn up each time, cleaning arranged, repairs and maintenance undertaken, inspections between tenancies organised, condition reports prepared, as well as just generally making sure your holiday home is an attractive one for other people to visit compared to others in the area.

So in summary, I would say a holiday home is not a good investment but if you have the cash flow to support a holiday home without requiring solid investment performance then buy one and enjoy it but let's just remember it is a lifestyle investment and it's probably way down the list of better investments in your portfolio.

2006: Where to from here?

As 2006 draws to a close, the Australian economy is neither shooting the lights out, nor crashing through the floor. In fact, different regions and market sectors across the country are telling quite different stories. Western Australia, Northern Queensland and the Northern Territory are continuing to benefit from the resources boom, while New South Wales, Victoria and South Australia - (the service and manufacturing areas) are not doing so well, posting growth rates of around 1%. As the resources boom cools down, the economy could become even more fragile, however other signs point towards recovery next year.

There have been some considerable changes within the economy in 2006. The two interest rate rises, combined with high petrol prices, have resulted in reductions in consumer spending, and a more vulnerable economy in general. Many Australians are now experiencing a monetary hangover from the excesses of the housing boom, while the worsening of the drought conditions since the beginning of the year have had a negative impact on the prospects for the rural sector.

The result has been an economy that was probably a little softer than what many expected, with the current growth rate of 1.9% well short of the growth rates experienced by other countries across the globe. While this growth rate is predicted to pick up over time - possibly to 2% by the end of 2006 and 3% over 2007 - at that level, Australia's growth rate remains below its longer term growth trend.

Countries such as the USA, Japan and even some parts of Europe grew at a faster rate than Australia in 2006. Despite being one of the key beneficiaries of the commodities boom, Australia's export sector wasn't able to lift its output in order to meet stronger demand from overseas. There are signs, however, that the export sector is improving, and may start to contribute to economic growth late this year or early in 2007.

The home front

The main influences on the Australian economy this year have been the interest rate rises and high oil prices, which have put the brakes on the domestic economy. Some could also argue that the price of bananas impacted on the economy, with the price of petrol and bananas pushing inflations figures up in what was otherwise a healthy consumer price index, resulting in the rate hikes. The key drivers for the growth in the economy have been the strength of the global economy, and the demand for resources, particularly for Western Australia and Queensland.

While consumer spending has been strong in recent years, in 2006 it was below its longer term trend. With the housing boom abating, so did the demand for consumer goods. Interest rate rises forced consumers to cut back on discretionary goods such as clothing and certain items of food; however gadgets such as ipods and digital cameras continued to sell. Retail sales were relatively flat, apart from artificial boosts created by two massive clearance sales hosted by one of the major department stores.

Employment growth has been strong, with 10 consecutive months of growth leading up to August 2006. Much of the growth was associated with the resources boom, while government jobs also played a big role. Mining, construction and engineering jobs continue to do well at the moment, while finance jobs have also been picking up somewhat. Areas such as retail have been softer throughout the year. As the baby boomers begin to move out of the workforce, it shouldn't be a great surprise to see unemployment rates at around 4-5%, reflecting the structural changes in the labour force. This trend is also becoming evident in Europe, Japan and the USA.

Economists are split on the issue of further interest rate rises - with one half believing that rates are on hold, and the other half predicting there may be one more on the way. Some from the former camp believe there is even the potential for rate cuts next year as the cost of inflationary items, such as petrol and bananas, reduce. A soggy property market and worsening drought conditions could also play a part in forcing rate cuts in the early months of 2007.

Australian equities

Australian shares are still looking impressive. Price to earnings ratios are at the best levels seen in 15 years, and while these figures may be influenced by changes in accounting laws, earnings are good, and valuation levels have improved. While the share market was supported by the growth in commodities, this appears to be abating.

The volatility experienced over the last five months can be traced to the volatility in oil prices. With oil coming down since the start of August, there has been a reassessment of the outlook for the energy and resources sectors, resulting in a shift away from the commodity focused areas towards more defensive sectors. Base metal prices held up relatively well, while gold came down. Utilities and property trusts performed well in recent months, as did some transport companies.

In the coming year we can expect returns on Australian shares of around 10-12%, a move back towards longer term performance levels. Looking forward, the resources sector won't continue to perform at the level it has been over recent years, and the domestically focused areas of the market such as the financial and retail sectors, utilities and property trusts, will be picking up the slack. With areas such as the mining and energy sectors having had their time in the sun, the focus will really be on the more domestic areas of the market. Meanwhile, the effects of the drought may weigh on areas such as food, regional banks, and domestic transport companies.

Property

Over 2006, residential property prices in Australia soared in the West and the North, while remaining flat in the Eastern states. Western Australia was driven by the strong demand for resources, with the economy's strong performance in this area reflected in the property market. The Northern Territory also benefited from this phenomenon. However, these are areas that were lagging behind in the housing cycle, so while benefiting from the resources boom, they are also effectively playing catch up with the property market trends of the Eastern states. This bubble could well burst in 2007 for the Western and Northern states.
In October, residential property prices were growing at around 6% - a figure that was to some extent influenced by WA prices. Over the next 12 months prices in WA may cool somewhat, but we may see an improvement in the Eastern and Southern states, resulting in likely growth of around 5-7%. If interest rates do go up again, homeowners in Sydney and Melbourne, and possibly Brisbane, may suffer.

But while prices have been flat over the past year in the East, in the coming year the top end of the market, whether in Sydney, Melbourne or even Brisbane, should continue to perform well, and outperform those areas outside the capital cities. Regional areas may suffer more than metropolitan areas, particularly in the next six months, due to the impact of the drought. In addition, part of the attraction of regional property was the unaffordable nature of property in capital cities, but as these prices begin to fall, regional properties will seem relatively expensive.

Non-residential property performed well over 2006, as non-residential tends to be more defensive than its counterpart. With the unemployment rate at low levels, demand for office space has been firm, and continued strong demand for office and retail space is expected over the next 12 months; though investors should be wary of chasing prices too high.

Outlook for 2007

Moving into 2007, there are a few reasons why investors may not be entirely optimistic about the health of the Australian economy. Further interest rate rises in 2007 would certainly be a cause for concern, while the reduction in commodity prices could also see one of main supports of the Australian economy fall away. However, our economists predict that the growth rate may pick up throughout 2007, particularly if interest rates remain unchanged. With stable interest rates and lower petrol prices, there will be the potential for the eastern residential housing market to recover and consumer spending to increase. With the export sector showing better signs for the new year, the Australian economy may grow at around 3% in 2007, with modest growth across most of the key sectors.

Building your wealth - BRIC by BRIC