In the face of much uncertainty, experts try to forecast what's in store for 2012, writes John Collett.
It's been a year best forgotten: the Australian sharemarket has lost almost 10 per cent and house prices nationally are about 3 per cent lower. Returns on superannuation funds are flat over the same period.
But there were a few bright spots among the defensive and safe-haven assets. Gold prices are 20 per cent higher than at the start of the year, Australian government bonds produced a total return (capital growth and income) of about 10 per cent and cash returned 4.5 per cent. Among the "growth" assets, Australian unlisted commercial property is one of the few to produce positive returns of about 10 per cent since January.
"A year ago, I was expecting the recovery to be more sustainable," the chief economist at AMP Capital Investors, Shane Oliver, says. "But it has been whacked by just about everything imaginable," he says.
The first half of the year saw flooding on the east coast, the New Zealand earthquake in February and then the Japanese earthquake and tsunami in March. Civil unrest and war in parts of North Africa and the Middle East saw oil prices surge and contributed to an economic slowdown in the US and Europe. The slowdown was compounded in the second half of the year by the debt crises in the US and especially in the euro zone.
Where to for shares
Against this gloomy backdrop, Australian shares are cheap and listed companies overall are growing their earnings at an annual rate of between 5 per cent and 10 per cent. But there is a big difference between industry sectors. The big miners and banks are enjoying good profit growth but other sectors, such as retail and manufacturing, are struggling.
Oliver suggests the big companies that pay secure dividends are the best bet for investors over the next year. But he is expecting the volatility to continue. He says domestic interest rates could be cut three times over the next 12 months to 3.75 per cent from 4.5 per cent now, which would be supportive of share prices.
But the head of investment research at Perpetual, Matthew Sherwood, says the big question for investors over the next year is whether the euro zone will suffer a short and sharp recession or one that is deep and drawn out.
"If the recession in Europe is short and shallow, growth in the US and Asia should be able to carry markets along," he says.
An economist with CommSec, Savanth Sebastian, says if the European recession is deep, it will have implications for the global economy and for Australia, given the strong link between global economic growth and commodity prices.
That's the worst-case scenario. Sebastian is expecting stronger domestic economic growth in the second half of next year. He is forecasting that the S&P/ASX 200 index, which is just over 4000 points now, will finish next year at 4600 points, or about 15 per cent higher. That's still a long way from the sharemarket peak of 6800 points in early November 2007.
The chief economist at BT Financial Group, Chris Caton, says sharemarkets here and overseas are cheap. As long as sentiment stops getting worse and the situation in the euro zone stabilises, Caton thinks sharemarkets will get some traction. The Australian sharemarket could even hit 5000 points - a rise of almost 20 per cent - by the end of next year.
The price of houses and units nationally is about 3 per cent lower than at the start of the year.
Oliver says prices could continue to slide during the first half of next year, before rising in the second half in response to interest rate cuts. But house prices could end 2012 where they started it, he says.
Sebastian thinks house prices will do better, finishing next year 3 per cent to 5 per cent higher. The rise will be driven mostly by investors attracted to the property market by low vacancy rates and higher rental yields, he says.
The managing director of specialist property researcher SQM Research, Louis Christopher, says even assuming no cuts in interest rates, prices could be 3 per cent to 5 per cent higher by the end of next year. "Assuming that Europe stabilises, the property market will bottom early next year and we will start to get a modest recovery," he says.
Christopher is bullish on prospects for Sydney property prices. "Sydney is one city where we do believe there is a housing shortage we are building fewer homes in Sydney than we did 30 years ago," he says.
Vacancy rates in western Sydney are less than 1 per cent and rents in Sydney are growing at more than 6 per cent a year, he says. He expects investor activity to increase.
But Christopher says there is a risk to the relatively rosy picture on Sydney house prices and that is if the euro debt crisis worsens and our banks start to ration credit and lower their loan-to-valuation ratios. In this worst-case scenario, any sustained recovery in property prices would be off and prices could continue to fall into next year, he says.
Some economists are a bit more cautious on the outlook.
The chief economist at JP Morgan, Stephen Walters, expects the troubles in Europe to continue. The euro zone is in recession and investor confidence is likely to remain skittish, he says.
On a 12-month view, Walters
says cash is attractive. Ratecity.com.au shows term deposits of more than 30 days are still paying over 5 per cent.
Outlook for the year ahead
Weekend Money asked leading economists for their views on where Australian shares, interest rates and property prices will be at the end of next year.
Forecasting is notoriously difficult. It is hard enough when the forecasts are given as ranges, let alone as "point" forecasts as shown in the table. As the economists point out, the odds of getting point forecasts right is low. Investor sentiment and psychology which is notoriously unpredictable can swamp the financial fundamentals. That's what makes it so difficult.
Investors should always consider the different assumptions behind the forecasts.