This year has been a subdued one for Australian investors with those holding overseas investments, particularly US shares, doing much better.
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Domestic share prices are flat, with returns coming from dividends. Interest rates remain at a 50-year low of 2.5 per cent, with term deposits paying not much more.
There has been a lack of X-factor events this year. Around the world there was, thankfully, an absence of super typhoons or debacles such as the US government shutdown at the end of last year.
Most of the news this year that could have affected markets has been well flagged. Markets, for example, hardly missed a beat when the US Federal Reserve said in October it would be ending its money printing program.
Other key events for investment markets, such as lower commodities prices, particularly iron ore, whose price has continued to fall this year, and lower oil and coal prices, China's slowing economy, and a lower Australian dollar, have sparked a sell-off of Australian resources stocks.
However, among the generally lacklustre domestic markets are a couple of standouts.
Bright spots
Over the past year Australian listed property trusts, including distributions, have returned about 16.5 per cent. Led by one of the giants, Westfield Corporation, which owns shopping centres around the world, the sector had a particularly strong October and November.
Those Australian Real Estate Investment Trusts (A-REITs) with overseas property have been helped along by the weaker Australian dollar. That is because a weaker dollar adds to the returns from overseas investments, such as overseas property held by property trusts.
Investors have also done well out of investment property this year, at least those with property investments in Sydney and in most parts of Melbourne. A lower Australian dollar adds to the return from overseas investments. The Australian dollar was about US89¢ at the start of the year and is now at about 85¢ cents after rising to a high of US95¢ in the middle of the year.
A lower Australian dollar against the US dollar adds to the returns on any investment that is priced in US dollars. Share prices in the United States, as represented by the S&P 500, are about 12 per cent higher, so far this year, on the back of improving US economic data.
In Australian dollar terms, and after including dividends, US shares have returned almost 20 per cent.
Australian shares
As Australian investors have a strong home bias, they are missing out on the better returns from overseas markets.
These include Indian shares which, on the back of the election of Narendra Modi as prime minister and the prospects for reform of the Indian economy, are up more than 30 per cent this year.
"There have been worries about China and falls in the iron oil price and mixed conditions domestically that have weighed on the domestic sharemarket," says Shane Oliver, chief economist at AMP Capital Investors.
Craig James, the chief economist at CommSec, says: "We have had a choppy year in terms of the sharemarket," with the Australian share prices, as measured by the S&P/ASX 200, flat since the start of the year, with the 4 per cent total return coming from dividends.
"It has been a period of consolidation after the strong returns of last year," James says. Over 2013, Australian share prices rose by more than 15 per cent, with total returns of more than 20 per cent after dividends are included, which was about the same as the total return in 2012.
"We have the impact in Australia of the fall in energy prices and in commodity prices more generally," James says. "US shares have done well and its highlights that diversified portfolios are what people should be aiming for," he says.
Real estate
"Property overall has been one of the key winners this year," Craig James says. "We have significant demand for property, not just residential but commercial as well as demand from overseas investors," he says.
Shane Oliver says property investors in both major cities, particularly Sydney, have done well this year, but it has been a mixed bag elsewhere.
"In the end, the rise in house price has been very much dominated by Sydney and Melbourne," says Matthew Sherwood, the head of investment market research at Perpetual.
"The rest of the states have been reasonably quiet," he says. CoreLogic RP Data says over the 12 months to November 31, Sydney dwelling prices have risen 13.2 per cent and Melbourne prices by 8.3 per cent.
Over the three months to November 31, the lowest rental yields of the capital cities are in Melbourne, with units showing a gross yield of 4.2 per cent. Cameron Kusher, CoreLogic RP Data research analyst, says price rises are slowing, with auction clearance rates falling in Sydney and Melbourne.
Trouble at the top
Louis Christopher, managing director of specialist property researcher SQM Research, says there have been big differences within the Sydney property market.
Prices in Sydney's northern beaches have risen by between 7 to 9 per cent compared with the Sydney-wide average that he estimates to be about 15 per cent over the past year.
Christopher says Sydney's "upper end"; those houses over $2 million, have struggled during 2014. "The lower north shore has also underperformed the broader market, but that is more to do with the fact that there is has a high proportion of properties over the $2 million mark," Christopher says.
Sydney's western suburbs have done well, as has the upper north shore. "Overall, it has been a good year for investors in the Sydney market and we believe it will be another good year next year," he says.
Interest rates are likely to stay low for longer and rates may not rise until 2016, he says. Sydney could see price rise of between 8 to 12 per cent during 2015, he says.
Prices of Melbourne's inner-city apartment market in Docklands and Southbank have been flat over the year, Christopher says.
The best gains in Melbourne, of between 6 and 9 per cent, have been in inner city areas such as Carlton, Richmond, Albert Park and St Kilda, Christopher says, adding that prices in these areas are likely to rise by about the same during 2015.
Superannuation
Superannuation funds have returned about 5.7 per cent for the first 10 months of this year, according to SuperRatings.
That is not a bad return, given that the median-performing balanced option, where most people have their money, has produced an average annual return of 6.8 per cent over the past 10 years.
A return of 5.7 per cent, with the November returns yet to be reported and December still to come, is still about 3 percentage points above inflation.
The main reason for the lower performance of super this year compared with 16 per cent in 2013 and almost 12 per cent in 2012, is the flat performance of Australian shares.
The typical balanced option has about 30 per cent of its money invested in Australian shares.
About 20 per cent is invested in global shares, with strongly-performing US shares making up about half of that. Warren Chant, the director of superannuation researcher Chant West, says: "With the end of the year in sight it's likely that we'll see a positive return – not in the double digits but well ahead of the rate of inflation."
He says: "While it won't be anywhere near the lofty returns of the previous two [years] it will still represent the fifth positive return in the past six years and the 10th in the past 12," he says.
Best bets for 2015
- Real estate analysts expect Sydney and Melbourne property to continue to see good price rises next year. Interest rates are likely to stay low for longer, which will be good for property prices.
- With the Australian economy slowing, there is increasing speculation the Reserve Bank may even cut interest rates one more time next year. That would mean even lower returns from cash and term deposits, which may support the share prices of the big-yielding stocks such as the banks and Telstra.
- With resources stocks and particularly energy stocks likely to continue to struggle next year, there are some sectors that could do well in tough times. These include the defensive sectors such as healthcare, telcos and utilities.
- The smart money is that the better returns will come from overseas shares next year. The US sharemarket is likely to continue to do well as the US economy improves.
