Cash is hot. Equities are not
A model portfolio for 1998.
Thursday, February 12th 1998, 12:00AM
An investment portfolio tailored to the predicted outlook for 1998 would look quite a bit different to one built around a more traditional benchmark asset allocation.Such a portfolio would be overweight in cash and bonds and heavily underweight in equities, according to a panel of investment experts at the FPG Research National Managed Investments conference.
The key factors in developing this model portfolio are the unknown impact the Asian crisis will have on global markets, and the resulting uncertainty and volatility.
Because of the volatility the panel suggested investors should add a degree of protection to their portfolios through the inclusion of a trading or futures-type fund.
The idea being that these funds do well when there is market volatility, and they are not closely correlated to other asset classes.
Also the panel suggested the international bonds are hedged and stocks remain unhedged.
The defensive nature of the 1998 portfolio is the overweight positions in New Zealand cash and bonds (the panel were neutral on Australian bonds), plus the overweighting in international bonds.
The panel the year was made up of Global Asset Management London-based director Richard Worts, EquitiLink Australia investment director Ouma Sananikone-Fletcher, International Bank Credit Analyst managing editor Stephen Poloz, Westpac Investment Management general manager Girol Karacaoglu, Bank of New Zealand head of private banking Donal Curtin and FPG Research head of qualitative research Judith Towler.
Undoubtedly the big issue for investors this year is what happens in Asia and what impact that region will have on other markets.
There was no unanimity among speakers at the conference on this issue, however Poloz summed up by saying the overall feeling was that all the risks were on the downside. He expected Asia would stay down for a couple of years before bouncing back.
Asia 2000 chief executive Phillip Gibson summed up Asia by saying the outlook is uncertain.
"Provided governments come up with firm policy responses the damage may be relatively confined, with a recovery stretching over 2-3 years. But there are significant downside risks, including a Chinese devaluation, and further shocks in Japan.
"Speed and effectiveness of policy responses, and political stability, will be critical to the timing of the recovery in all the crisis economies.
"Failure in this area could significantly delay recovery, perhaps up to 4-5 years in extreme cases," he says.
Three experts spoke at the conference on the outlook for international equities and all of them painted a pretty gloomy picture.
Worts summed it up, saying that with all the volatility and the unquantified impact of the Asian crisis the emphasis for investors should be on stock pickers, not index based funds.
|
Asset class |
Bench-mark |
Change |
1998 Asset Allocation |
|
New Zealand cash |
5 |
+5 |
10 |
|
New Zealand/Australian bonds |
10 |
+5 |
15 |
|
International bonds |
20 |
+10 |
30 |
|
New Zealand property |
5 |
0 |
5 |
|
New Zealand equities |
5 |
0 |
5 |
|
Australian equities |
10 |
-5 |
5 |
|
International equities |
45 |
-20 |
25 |
|
Other |
0 |
+5 |
5 |
|
TOTAL |
100 |
|
100 |
Closer to home the EquitiLink head of equities Craig Hood and JB Were manager Andrew Macmillan predicted Australian sharemarket would be flat this year.
Last year the market was propelled by a 45.5 per cent return in the banking sector. Banks were not expected to repeat this performance and laggard resource sector, which produced a negative 17.2 per cent return, was anticipated to struggle again this year.
Both managers predicted this year's performance would be patchy and stock selection would be crucial.
Macmillian says while JB Were are underweight in growth assets while the Asian crisis continues. The only bright spot was listed property trusts that were producing historically high yields.
They recommended investors in the Australian market bide their time until the second half of the year when things are expected to pick up.
New Zealand managers, Stephen Walker and Ross Weavers from AMP and Guardian Assurance respectively painted a more positive picture.
Walker told the conference that AMP expected a 15 per cent total return from the market this year, fuelled by tax cuts, and the AMP share float.
Overhanging the market was Asia and Ameritech's holding in Telecom that is up for sale.
Weavers said he was positive, but cautious about the first six months of the year.
Armstrong Jones general manager of property, David Blight, predicted the sector would produce returns of between 11 and 12 per cent and the bulk of that (10 per cent) would come from income.
For further information on what 1998 holds visit Good Returns' special report Financial Forecasts - Your guide to 1998
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