Light at the end of the tunnel

Denis Donohue

The outlook for all investment sectors is positive from 2010, according to a panel of experts at the PortfolioConstruction Conference.

Solaris Investment Management managing director Denis Donohue said based on brokers reports, the ASX 200 should be delivering 12.1 per cent growth by 2010.

“The capital growth will be driven by earnings per share growth, which is forecast to be about 11 per cent,” he said.

The resources sector is tipped to deliver strong growth and even the banks are back in favour with growth of about 7.5 per cent.

Australian real estate investment trusts (REITs) are forecast to deliver 4 per cent growth.

International equities will deliver returns in the high single digits, which is in line with the past decade’s performance of the sector, T. Rowe Price portfolio manager Scott Berg said.

“While we have growth in earnings, world GDP [gross domestic product] is slowing,” he said.

“A lot of operating margins in businesses are at near highs and the cost of financing is being balanced out by companies not being so leveraged.”

Berg said he expected pre-dividend earnings to be about 6 per cent.

Earnings per share (EPS) growth will not be at the levels seen during the most recent growth cycle, Berg said.

“During the past 100 years, company earnings have averaged 1 per cent and they are very dependent on GDP,” he said.

“If you want earnings to grow, we have to see higher GDP, so there will be a real return of about 3.5 per cent on international equities.”

It will be a similar return for global REITs, ING Clarion Real Estate managing director Steve Burton said.

The driver of global REIT returns will still be Hong Kong and China, which is expected to deliver growth of 26.3 per cent in 2009.

This will compare to 7.6 per cent in the UK and 4.2 per cent in Australia.

The Australian direct property market will see rental growth of about 3 per cent, Atchison Consultants principal Ken Atchison said.

“There is rental income growth in the market as there isn’t the overcapacity we had 20 years ago,” he said.

Global bond yields are expected to deliver returns of between 6 per cent and 6.5 per cent in fixed interest, PIMCO managing director Douglas Hodge said.

This is despite the financial sector being hit by “the unthinkable”.

“There have been runs on banks in the most sophisticated markets in the world — the US and the UK,” he said.

“The US Secretary had to ask Congress for a blank cheque to rescue Fannie and Freddie.”

The outcome of the crisis will be a restricted supply of credit in markets.

“If the providers of capital are in trouble, then it also applies to the users of credit,” Hodge said.

“It will take time to work out the excesses of the credit bubble, but the people who come through this will never do it again.”