Small investors are slipping back into the sharemarket, writes Richard Webb.
SHARES are primed to rally up to 11 per cent higher by year's end as the global financial turmoil eases, investor confidence returns and local companies deliver on their profit promises, market experts say.
As a sign of this growing optimism, retail stockbrokers are reporting that their phones are starting to ring again after some lean years for the industry, while financial planners say their clients are also starting to shift back to more normal equity weightings.
Shares are no longer completely on the nose for small investors, as witnessed last week by the strong overall 2.6 per cent gain in the S&P/ASX 200. Since the start of the year, the index is up 6 per cent.
That's not bad going, until you realise the sharemarket is no higher now than it was last August - and was also at this level in late 2008. The principal rule of share investing is that it's for the long term. But if you had parked your money into shares five years ago, you would have lost about a third of that investment by now.
No wonder that in the past couple of years mum and dad investors have sold out of the sharemarket and moved to the safety of term and cash deposits, which at least guarantee some annual return and no losses.
But Simon Bond, partner at stockbroker RBS Morgans Newport, says the flow of money is starting to turn again. It's a dribble back to shares but if it grows into a tsunami, stocks will take off.
"I think people are underestimating the level of underinvestment in shares right now, both here and overseas. There's an awful lot of money sitting in term deposits and fixed interest just looking for another home, and I would be definitely looking to get some of it back into shares right now."
Austock senior client adviser Michael Heffernan agrees. He's pencilled in 4800 points for the S&P/ASX 200 by the end of the year, a gain of 11 per cent.
"As long as we get fewer factor Xs - the cyclones, the tsunamis, the crisis in Greece, US debt ceiling issues - that derailed the market last year, we could be in for a very good year indeed,'' he says.
"There's great value in the sharemarket right now and valuations not seen for any length of time since the late 1970s. We've got sentiment improving, confidence returning and as long as Europe keeps off the front page, I believe we're on the way back."
Macquarie Private Wealth divisional director Lucinda Chan says investors are gaining confidence because the global outlook is improving.
"The market should head higher from here," she says. "The US is a good story with solid economic data over the past few months. We know China is pulling back a little bit, but 8 per cent growth I'll take any day. Europe's another story in that it's going to be a long haul from here and we've yet to see what these austerity measures will deliver, but I personally wouldn't be worrying too much about it."
Paul Moran, principal of Paul Moran Financial Planning, says the prospect of a financial catastrophe derailing markets now is about the same as before the GFC.
"That means we should be back to a normal market, with its normal ups and downs - and also normal sharemarket expectations."
Mr Moran tells his clients a normal return for shares is 10 per cent a year - 6 per cent or so from the dividend plus tax credit, and capital growth of a further 3 to 4 per cent.
"Dividend yields are extraordinary in the sharemarket right now and valuations very attractive - I'm starting to see some optimism and we are advising our clients to move back to a normal long-term weighting for shares."
So what to buy? Mr Moran recommends top-20 index funds because the blue chips offer such good value right now there is no need to take a greater risk with smaller companies. "Most of the top stocks are 20 per cent or so below their 52-week highs - and the news has got better over the past 12 months, not worse."
Mr Bond says internet-based stocks such as Seek, Webjet, Carsales.com and Wotif.com are doing well, as are the mining services and engineering companies such as Monadelphous.
Mr Heffernan likes mining services, too, including Mineral Resources and Boart Longyear, and also the four-wheel-drive accessories manufacturer ARB Corp.
Ed Prendergast, a fund manager for Pengana Emerging Companies, which invests in small-cap businesses, is particularly positive about the smaller end of the sharemarket right now, too, if investors are feeling brave enough.
"History shows that in every recovery, small caps significantly outperform larger stocks from the market lows - that's because they got hammered much harder on the way down," he says.
"That was certainly the case this time, but since January it seems like the selling pressure has started to lift on the small-cap sector and people are beginning to realise that some of these companies have real market prospects and potentially strong earnings delivery.
"We are at a good starting point, where prices are low and people have had little faith in their earnings. That's starting to change and we now have the ingredients for a reasonably good recovery from here."
Frequently Asked Questions about this Article…
Is it safe for small investors to return to the sharemarket now?
The article says many market experts are optimistic and small investors are starting to trickle back into shares as global turmoil eases and confidence returns. The S&P/ASX 200 has shown recent gains (a 2.6% weekly rise and about 6% year‑to‑date), but advisers stress shares are a long‑term investment and markets still have normal ups and downs. A cautious, gradual return to equities and maintaining a long horizon is the approach advocated.
What kind of sharemarket returns do financial planners expect for everyday investors?
According to the article, a 'normal' return for shares is around 10% a year — roughly 6% from dividends (plus franking credits) and another 3–4% from capital growth, as noted by financial planner Paul Moran. Some market strategists also forecast up to about an 11% rally for the S&P/ASX 200 by year end if conditions remain favourable.
Which sectors and stocks are analysts recommending right now?
Advisers in the piece highlight value in blue‑chip stocks and certain sectors. Internet‑based stocks such as Seek, Webjet, Carsales.com and Wotif.com are doing well, while mining services and engineering names like Monadelphous, Mineral Resources and Boart Longyear are favoured. ARB Corp is also mentioned. For lower risk, one adviser recommends top‑20 index funds to capture blue‑chip value.
Should I invest in small‑cap stocks or stick with blue chips?
Both views appear in the article: small caps historically outperform in recoveries and some fund managers (like Pengana’s) are positive about smaller companies if you can tolerate risk. However, other advisers recommend top‑20 index funds and blue chips right now because valuations offer good value and reduce stock‑specific risk. Your choice should reflect your risk tolerance and time horizon.
Are dividend yields attractive in the current market?
Yes. The article notes dividend yields are 'extraordinary' and overall valuations look attractive, which is one reason some advisers are telling clients to move back to a normal long‑term weighting in shares.
What’s driving the recent optimism in the Australian sharemarket?
Experts point to an improving global outlook (solid US data, continued growth in China), easing financial turmoil, and a large pool of money sitting in term deposits and fixed interest ready to move into equities. Lower valuations since the late 1970s and improving investor sentiment are also cited as reasons for optimism.
How should I change my portfolio allocation — move cash into shares now?
The article suggests a measured approach: many planners are advising clients to move back toward a normal long‑term equity weighting rather than rushing in. Simon Bond describes a slow 'dribble' back to shares and advisers recommend getting some money back into equities while keeping an eye on risk and diversification.
What risks should everyday investors remember before buying shares today?
The article cautions that markets can still be derailed by external shocks (cyclical events, geopolitical issues, European sovereign problems) and that shares are best for the long term. It also points out that someone who invested five years earlier would have been down about a third by now, so investors should diversify, understand volatility, and choose investments (index funds, blue chips or selective small caps) that match their risk tolerance.
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