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Shares in heaven in 2011

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by Peter Switzer

Welcome back to another year of investing and building wealth! You might have noticed some ill-informed commentary in newspapers and on websites about how the local stock market delivered negative returns for 2010 and while ‘somewhat’ correct, they really show that the people who write these diatribes are not really long-term investors.

These views are generally bandied around by the same ‘experts’ who said we were heading to hell in a hand basket in 2008 when Lehman Brothers failed. I have always thought our shares had a capacity to head towards the heavens after the big falls we saw in 2008 and I remain in this camp.

If you think investors all have a portfolio that matches the S&P/ASX 200, then they might have lost around 2.6 per cent on their share prices but with dividends they probably sneaked into positive territory. However, some critics point out that taking a 6.5 per cent fixed deposit would have been a better investment decision and that’s true but the main point is that we invest on a financial year basis, as this is what’s relevant for our tax returns.

Market rise

In the financial year 2009-10, the S&P/ASX 200 was up 8.8 per cent to finish at 4301.5 and that does not include dividends, which means shares were better than fixed deposits if your portfolio was as good as the index. On Friday, the index was at 4705, which means we’re up about 9.3 per cent since 1 July and that’s not a bad half-year return. You could pull up stakes and go to a fixed deposit now and pocket a nice three per cent for six months — given you can easily get six per cent for 12 months — and end up with a 12.3 per cent return plus dividends, but why give up on shares now?

Well, the objective answer might be it gets down to a better than expected US economic recovery versus the fears over European debt.

US watch

In the US, we have seen real estate confidence begin to rise, retail sales show up stronger than expected and experts think interest rates will rise this year, which is a good sign that the economy is moving further from its ‘basket case’ rating.

Now the jobless rates is at a one-and-a-half-year lows at 9.4 per cent and factory orders as well as manufacturing readings have all come in better than expected.

And last week, Goldman Sachs increased its 2011 target for the S&P 500 to 1500 and Deutsche Bank went higher with 1550.

This is what others think:

JPMorgan: 1425
Barclay's: 1420
Citigroup: 1400
Bank of America: 1400
BlackRock: 1350.

The S&P 500 is now at 1217.5 and if Deutsche Bank is right that would be a 27 per cent rise in the index! Even if they are half-right, most of us would jump at a 13.5 per cent return, wouldn’t we?

These figures say the expert market minds in the America’s most influential financial institutions are bullish and yes they understand the debt threats out there.

Goldman is so bullish it says the US economy will grow by five per cent, forward earnings-per-share will rise by 11 per cent, and the price-to-earnings ratio will expand by eight per cent.

Positive indicator

But the positive indicator, which makes me think that the bulls are in for a good year was the observation that $9.27 billion went into equity funds in the week that ended January five and this matches pretty closely with the money that left the money market in the US.

Cash is coming off the sidelines back into shares, which is an important development and now we have to hope that the Eurozone officials and governments can handle the big, black clouds hanging over their banks and sovereign debt.

Keep an eye on Europe

Spain is the really important test case that could rock market confidence and so, if you need something to worry about, this is the issue that should rob you of sleep each night.

I don’t like the way the Europeans handle financial crises and they pose a risk to share prices. That said I am cautiously confident that shares will return better than fixed deposits over the rest of this financial year.

Only Europe stands in our way of our shares ending up in heaven in 2011.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, January 10, 2011