Volatility: It Was Business as Usual for 2011 and You Can Expect the Same for 2012.

By Jason Fittler

2011 may not go down as the best year on the Australian stock market but in my book I am happy with the results given the economic cycle we are in.

The market started the financial year at 4250, topped at 4950, finished at 4650. For the year you received growth of around 9% plus dividends. 

2011 was all about buying quality businesses and holding for the income. Growth on these businesses will come in time but the economy needs to become stable first.

For me 2011 was all about the USA markets starting to wake up and get going again.

I was not disappointed with the NASDAQ, S&P 500 and DOW Jones being the top three moving markets this year, all of which gained more than 25%.

Back home it was the Materials, Industrials and Utilities stock which lead the way. In no small way due to the demand for Iron Ore still coming out of China. 

With interest rate rises continuing throughout 2011 we saw the Australian Dollar move from $0.85 per USD to a high of $1.10 and to settle at $1.05 on the year close. Great if you are traveling overseas, but it has come at a cost to our tourism business here in Australia.

We started the year with the government announcing the mining resources rent tax (MRRT), August saw the US Feds announce their willingness to continue to keep interest rates low.

September saw Australia with a hung parliament and the start of sovereign risk in Australia, October saw the Australian dollar hit parity and November the Reserve Bank of Australia raised rates to 4.75% while the Queensland Government started to sell assets to pay back a decade of rising debt. QR National first to go, Abbott was to follow as India purchased more Australian assets. 

December saw Obama agree to tax cuts for the top earners in the US, January was the start of the natural disasters for Australia, first the floods, February brought cyclone Yasi and March brought the Japan earthquake and tsunami.

April saw the ASX 200 hit 4950 and we saw the traders take profits pushing the market back into its 4500 to 4800 trading range of the past 3 years.

May saw commodity prices tumble as China tried to keep inflation under control, while gold hit a record as investors chased safety in the precious metal.

June brought the splits, with TABCORP and Fosters splitting up their business and Telstra finally getting the $11 Billion for the sale of their copper wire net work. Unfortunately the deal was not as good as expected as such the price dipped a little due to short term traders.

So what about the next 12 months?

I am expecting to see more companies look to split off assets such as Suncorp, consumer spending will fall further affecting marginal businesses such as airlines, automotive industry; residential housing and big ticket items like big screen televisions.

Materials sector should continue on however the high dollar will affect profits, retail non-discretionary will remain steady with perhaps a slight increase.

Finance sector will provide small but steady gains as interest rates move up and their margins improve. The carbon tax will be of a concern for all sectors and certainly keep a lid on foreign investment in Australia in the meantime. With the Greens taking over the Senate the level of sovereign risk in Australia will increase and weigh on the market.

Our strategy is to continue to look for those businesses which are trading below their intrinsic value, have low debt, high return on equity and assets, and are in a business which has high barriers to entry and solid cash flows.

We will look to buy for the income and hold for the long term growth.

If you look at the winners and losers for 2011 you will note the big winners were the small speculative material sector stocks, that end of the market is speculative trading not investing as such we will continue to stay away from these shares.

For more information please call me on (07) 4771 4577.