Seven smart investment strategies for 2010-11

The end of 2009-10 may seem a shocker for the sharemarket, however there is positive news among all of the gloom and uncertainty dominating investor sentiment.

The embattled state of the market presents a buying opportunity given that equity strategists, on average, expect the S&P/ASX200 to finish 2010-11 up at least 1000 points from its year-end close of 4301.5.

In short, the next 12 months overall should be much better for share investors, albeit expectations of continuing high volatility – particularly in the first half – along with concerns about sovereign debt and the slowing pace of the global economic recovery.

And any investors who are disappointed with the rise in the S&P/ASX200 of 8.8% for 2010-11 – given all of the optimism when the market initially swung into a sharp recovery phase from March last year – shouldn’t overlook the contribution of their dividends.

Once dividends are counted, the market actually returned a highly respectable 13.14%. And franking credits make this figure even sweeter.

Here are seven investment tips for 2010-11:

1. Take advantage of the settlement in the row over the renamed resources profits tax.

The settlement is clearly positive for mining stock, the local sharemarket and the overall economy.

And the breakthrough should make investors much more comfortable about investing in the miners.

David Cassidy, chief equity strategist for UBS, believes that the outlook for resource stocks will turn on global economic growth. UBS is “not a believer” in a double-dip global recession and expects a soft landing for China’s cooling economy. This should be good for resource stocks over the medium-term, says Cassidy.

Cassidy does add, however, that the market had already priced-in a settlement of the tax dispute into resource stocks over the past month.

2. Don’t be overly pessimistic about the economic outlook.

As discussed earlier, equity strategists generally are quite positive in their expectations for the market in 2010-11. And a number believe the pessimism dominating the market in recent weeks is being overplayed.

Greg Goodsell, an equity strategist for RBS, for instance, is optimistic that the banks in the European Union will emerge positively from being “stress-tested”. The results will be released late this month.

Goodsell says a positive result from the critical stress-testing will be a good sign for the markets. “Our view is that the issues in Europe will be resolved and this test will be a key part of that.”

Further, Goodsell is expecting “pretty good” US and Australian company reporting seasons. He anticipates that the S&P/ASX200 will reach 5500 by the end of 2010-11.

3. Make the most of inevitable buying opportunities ahead in this choppy market.

This will be one of the core strategies for investment success over the 12 months ahead.

Trevor Greetham, director of asset allocation for Fidelity International, reports in the fund manager’s mid-year update for global equities that its large overweight exposure to equities in its multi-asset funds has been trimmed. The intention is to buy back in the dips later in the calendar year, he says.

This buying would be ahead of what Greetham expects to be a strong rally in 2011. “Valuations are still good and I believe there will be good buying opportunities later in the year,” he says. “So investors who missed out on the first leg of the bull market may find themselves presented with attractive entry points in coming months.”

“As an open-minded investor,” Greetham adds,” I will listen with interest but I don’t expect the pessimists to be right [about a double-dip recession overseas] … but that doesn’t preclude shocks along the way.”

4. Understand possible investment implications of the Cooper super review for your DIY fund.

The review recommends that self-managed funds be prohibited from owning any so-called in-house assets. In short, these are related-party investments with the exception of any business real estate which is not classified as an in-house asset.

If the Government accepts the recommendation, as can be expected, it is likely to refocus the attention of fund trustees on more conventional investments, particularly listed shares and bonds.

In turn, this means that trustees should now be thinking about what assets should replace their current or planned in-house assets. Given the likely buying opportunities on the sharemarket that will continue to arise in coming months, heavily sold-off quality stocks might be one of the first investments to consider.

In-house assets include loans, investments or leases involving related parties of the fund (including members as well as entities that are majority owned or controlled by members, their partners and relatives).

The prohibition of in-house assets would typically be positive for fund returns. This is because self-managed funds are probably more likely to lose money on investments involving these assets than conventional investments.

And it would remove much of the temptation for DIY fund trustees to get involved with perhaps questionable investments that are associated with the members, their families or other associates.

Under current superannuation law, a self-managed fund cannot hold more than 5% of its assets (based on value) in in-house assets.

The Cooper review recommends that the Government give self-managed funds five years to dispose of their in-house assets or to convert to what are known as a small APRA fund, with a professional APRA-approved trustee and under the regulation of APRA. (The review does not recommend that small APRA funds be included in a prohibition of in-house assets.)

5. Consider roles of defensive and cyclical stocks in your share portfolio.

Some investors are continuing to shore up their portfolios with defensive stocks – such as non-discretionary retailer Woolworths – with businesses which are supported by customers through the good and bad times. This is largely in reaction to the intense market volatility and debate over the global economic outlook.

Interesting, David Cassidy of UBS believes that the time to increase exposure to defensive stocks would have been two months ago. “Right now, cyclicals look oversold,” he says.

Cyclical stocks – which tend to move with business cycles – would include Fairfax, News Corporation, AMP, Qantas and Brambles.

6. Focus more on income-producing stocks to help ride out the volatility.

A key psychological aid in an extremely volatile market is to try to distract your attention away from daily movements in share prices. Jack Bogle, legendary founder of the Vanguard investment group, for instance, has a don’t-peek-in-volatile-times rule, meaning he doesn’t follow how the value of his portfolio is moving day-to-day.

Another strategy is to ensure your portfolio includes a line-up of quality companies with track records of paying excellent dividends.

Cassidy points out the prices of bank stocks, for example, have “come back quite a bit” yet their dividends are still good. The price of Westpac, for instance, has been particularly hard hit.

Westpac is trading on a historic grossed-up dividend yield of more than 8% (which includes the value of its franking credits).

Interestingly, equity strategist for UBS Greg Goodsell forecasts that the average dividend yield for the S&P/ASX200 will rise from 3.9% in 2009-10 to 4.6% in 2010-11. He says Australian companies are well capitalised and there is a solid case to increase dividends – which had been cut by a number of companies.

On the other hand, Commsec economist Savanth Sebastian believes it is too early to expect companies to increase their dividends. Incidentally, Sebastian emphasises that Commsec is optimistic about the outlook for share prices in 2010-11, looking to the S&P/ASX200 reaching 5400 by June 2011.

7. Build-up your cash coffers.

This will both reduce the likelihood of being forced to sell stocks in downturns and provide the money to take advantage of buying opportunities. And this cash will help cushion your portfolio from the worst of the volatility.