Middletons Securities spokesperson, Mr Matthew Stobart, said barring a disaster like a Global pandemic or an escalation of the ISIL or the Ukrainian conflicts, 2015 was expected to be a good environment for investors.

“While property and share prices aren’t too expensive at the moment, it’s difficult to find investment options that are cheap – so investors need to have realistic expectations”, he said.

The Middletons Securities Top 5 investment ideas for 2015 are:

1. Emerging Markets

There is deep value in emerging markets. Share markets in emerging economies are typically considered more volatile and tend to lag behind broader international markets. As well as taking advantage of attractive valuations, there are a number of fundamental reasons for investing in emerging markets – the populations are usually younger, the economies grow faster than developed economies and so are average wages. Government and personal debt levels are lower in developing economies, and corporate balance sheets are stronger – with lower debt and a higher return on equity. Currently share prices are cheap and ideal for investors that can tolerate and manage the volatility.

2. Inflation Indexed Income

With a higher level of inflation in Australia almost inevitable at some point in time, investors can adopt a position where they can have an each way bet by buying bonds with inflation indexation and investing in the inflation indexed income from infrastructure. Until recently, indexed bonds weren’t readily available to ordinary investors and were typically bought and traded by institutions, but are now available through the Australian Securities Exchange and intermediaries on the Corporate Bond Market.

Corporate Indexed Bonds are typically issued by infrastructure owners who have monopoly protection and guaranteed inflation adjusted income, and offer a running yield close to what you’d get from term deposits (around 3.4%). So the inflation protection is free. The other option is to invest directly in infrastructure. Internationally, the reliability of Utilities with monopolies sees them trading at lower yields than have traditionally been expected in Australia. In the long term we would expect this gap to narrow so the investment price should rise. Along the way investors can enjoy a yield of around 5%, and because these investments are geared, the yield is expected to grow at a rate above the inflation rate.

3. Australian Real Estate Investment Trusts

Listed Property Trusts, as they were previously known, suffered badly during the Global Financial Crisis. They had too much debt and were forced to raise capital at a deep discount.

Now the’re looking good. Investors can receive a yield of 5-6% as the net yield after retained income, and given the quality of the properties, those who buy these investments at current prices are getting excellent value. Property generally handles periods of inflation better than shares because rents keep better pace with inflation than profits, and the cost involved in building new properties goes up with
inflation too.

4. Construction will be a Growth Driver

Australia’s population is growing at a rate that’s well above the world average. Also, there is a bubble of population, largely the children of the baby boomers, who will move into their own homes in increasing numbers over the next ten years. The demand for new housing will rise. Meanwhile our Governments plan to spend $50 billion on new infrastructure projects. All this is positive for the construction industries.

The share price of materials suppliers like Boral and CSR have already risen to very high levels in anticipation of better times, but there is still reasonable value in the large engineering contractors, especially those involved in housing development and infrastructure projects.

5. Return of the Consumer

The consumer has gone missing in recent years and at the same time there has been a shift towards ecommerce, so it’s been a tough time for traditional retailers. Our growing population will lift all retail activity over time, but consumer confidence is also expected to return. Household debt is under control and the net wealth of households is on the rise, and sooner or later this will be for cash registers. We also get the sense that the switch to online shopping is maturing. Consumers know what they are a going to buy on line and what they’re not. Our traditional retailers have joined in and now the vast majority of online transactions is between Australians.

Australia’s large retailers deserve a place in most portfolios. Woolworths’ share price looks like a safe bet, increasing earnings per share by ten times in the past twenty years, with a growth in earnings in all but one of those years. The other main player to be considered is Wesfarmers. Woolworths is slightly cheaper with a Price to Earnings Ratio (PE) of 16 compared to Wesfarmers at 20, but the anticipated earnings growth from Wesfarmers is higher as is their dividend payout ratio and consequently the yield.

More adventurous investors might be tempted by some of the smaller retail offerings and the environment is likely to be supportive.

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