Investing

Kathy Cave, client portfolio manager, Russell Investments

Shares or property?

Listed shares and property markets will continue to be volatile in 2012, with shares being ahead of property by December 2012. As investors become more confident about global macro factors, they are likely to favour shares rather than the more defensive listed property trusts. I am also wary of some of the structural issues in the listed property sector that may keep it trading at a discount to net tangible backing.

Why?

Australian shares are trading on lower valuation multiples than listed property, which has done comparatively well. High-quality defensive property trusts particularly are fully priced. They will provide some diversification benefits this year, but in both the short and longer term, shares have a much better earnings growth profile. The consensus estimate for share earnings growth in 2012 is about 11 per cent compared with about 2 per cent for listed property.

Besa Deda, chief economist, St George Bank

Shares or property?

Property, by a small margin. The AS51 Index was down 15 per cent last year. Financial stocks have been affected as the growing European crisis fans funding pressures and increases the chances of European banking collapses. Residential property fell 4 per cent(using RP Data). Low housing affordability, strong price growth in 2010 and restrictive interest rates softened housing conditions for much of 2011.

Why?

Uncertainty and heightened risk aversion will be core themes heading into 2012.

It’s likely to be a difficult year for the sharemarket, especially as the outlook for credit growth is also subdued. Housing lending has started to pick up and there are early signs prices might have reached bottom. The recent rate cuts, the national housing shortage, relatively low unemployment and a tightening rental market should lead to a recovery in the second half of 2012.

Paul Moran, principal planner, Paul Moran Financial Planning

Shares or property?

It is always difficult to predict in the short term. All we can really do is look to where the best value is, and how the investment meets the longer-term objectives of the investor. Two methods of determining “best” value include income earned and recent outperformance versus underperformance. On this basis, it would appear that shares are more likely to provide the best gains in the coming year.

Why?

If both property and sharemarkets remain subdued next year, yield earned will become important. Dividends on a basket of top 20 shares earn approximately 6 per cent including the tax credit. Residential properties in many capital cities yield around 3.5 per cent net. Contrarian investing suggests that we should be moving money into investments that have underperformed recently. It is pretty clear which asset class has done worst most recently.

Brian Parker, investment strategist, MLC

Shares or property?

Frankly, trying to pick winning asset classes over any given year is a mug’s game – but if you have to pick then I think shares will do better than property over the year ahead, and probably over the medium to longer term also. We still have a residential property market in Australia that is among the most expensive in the world. It still looks way overvalued, even though house prices have been grinding their way lower.

Why?

Overvaluations don’t tend to get corrected by big, nationwide collapses in property values. Instead, we tend to go through extended periods where property prices basically keep up with inflation until you reach a point where the incomes of potential buyers have caught up with prices. I think we’ve got some years of that ahead of us.

At the same time, shares have performed poorly, and there seems to be a good deal of bad news factored into markets right now. This is not to say that shares can’t weaken further in the short term; there are still plenty of things to worry about. We are still working through the aftermath of the GFC: not all past financial sins have been fully atoned for. There is a range of paths the world could take from this year, and not many of them look terribly positive. However, even allowing for that, shares look at least fairly valued right now, and fairly valued assets, by definition, should give you a fair return. I certainly wouldn’t describe Australian residential property as a fairly valued asset at this point.

Savanth Sebastian, economist, CommSec

Shares or property?

Despite the volatility in sharemarkets, it is likely that equities will outperform property over the coming year. Property prices have fallen for 10 months and while the recent rate cuts will support housing demand over the year, it is off a very low base. Housing credit is only crawling off 34-year lows, while new home sales are at 10-year lows. If demand doesn’t pick up, auction clearance rates will remain subdued.

Why?

It is unlikely that the property market will collapse in a heap. Population growth remains healthy, rental vacancy rates are historically low and overall prices should post gains of 3 to 5 per cent in 2012. The P/E ratio for the All Ordinaries is 11.5 times. This would suggest that shares represent good value. But back in the early 1980s, the P/E ratio averaged closer to 10 times.

Shares appear good value, but given reduced risk preferences, prices may merely be fair rather than cheap.In addition, the domestic market will continue to get its direction from what takes place on global sharemarkets. And the key focus over the first few months of 2012 will be the ongoing European debt concerns. Fear and uncertainty is likely to drive sharemarket volatility, and fundamentals will be less of a focus. What is needed is a more upbeat view on global economic recovery. And it may just be that while investors continue to wait for a solution to the debt crisis, the economic data out of the US will be more upbeat – indeed, it has already been the case over the past few months. In addition, expect the Asian region to continue to grow at a healthy pace, supported by further stimulus from policymakers in the region. Our end-year forecast for the S&P/ASX 200 suggests a healthy gain of about 11 per cent.