Asset allocation: buy Australian

Asset allocation strategies in 2006 will be very similar to last year, according to AMP Capital Investors head of investment strategy Shane Oliver.

“It will be a bit like last year but with more volatility,” he says.

“There will still be share market gains and we will be overweight in shares and underweight in bonds again.”

Oliver says Australian shares are still a profit growth story but with caution, as the market is still exposed to sudden shocks.

“My view is that it is not an easy call for asset allocation in 2006,” he says.

“Sudden events such as the oil price rise have made us more cautious.”

Oliver says equities will still offer better returns than other asset classes, but those returns will be down.

“I wouldn’t be doing anything radical with portfolios,” he says.

“Many investors need to hold international shares, but Australian equities still look a good alternative with dividend yields of about 4 per cent.”

Global shares add just 2 per cent return to a portfolio and are more dependent on growth.

“Australia is one of the only share markets where you get cash flow with franking credits,” Oliver says.

“It is hard to justify a big rotation away from Australian equities.”

The Australian share market is also supported by strong commodity prices, which have reached record highs. This compares to the US economy, which has record deficits hanging over the nation.

“Numbers in the US are scary and the trade deficit is worse than ours,” he says.

“You will need to be cautious allocating money to a US equity fund.”

Oliver says the key this year will be looking for defensive stocks in an equity portfolio, as exposure to bonds is hard to justify with yields so low.

The other investor favourite, listed property trusts, offer little comfort as the sector lags with a 6.9 per cent return for the year to November 2005.

“It is steady as she goes with deepening caution in asset allocation,” he says.

Volatile markets tend to come in four-year cycles — 1990, 1994 and 1998 were examples in the past decade, and 2002 was the first in the new decade.

Oliver argues this cycle is something to keep in mind as 2006 should be a volatile year.