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Markets surprise amid tales of woe

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Bad news about a slow Australian economy, the high Australian dollar and endless will they-won’t they fretting about the US taper have obscured a surprising truth this year – investors did pretty well on the stock market.

The Australian share market is finishing the year well into positive territory, up nine per cent after riding the coat-tails of a US market that is up 20 per cent.

Things still look sunny for 2014 too, although analysts warn it will be a year for the stock-pickers, requiring a bit of agility.

AMP head of investment strategy Shane Oliver says 2013 was notable for a lot of things that didn’t happen: Australia didn’t slide into recession, the United States didn’t fall off a fiscal cliff and China didn’t suffer an economic hard landing.

“Because all these disasters that had been feared didn’t happen it enabled markets to continue to rise,” Oliver said.

“The gains this year have been quite spectacular: for the year to date to November Australian shares have returned 19 per cent.”

One of the surprise local performers of 2013 was the consumer discretionary sector – stocks such as Harvey Norman, REA Group, Crown and Super Retail Group that do best when people are splashing some cash around.

Credit Suisse chief investment strategist for Australia, David McDonald, said it was a great year for everything except the Aussie dollar.

“We started the year telling people to be in equities and not bonds and we’ve always had a preference for offshore over domestic,” Mr McDonald said.

“That certainly played out – I think the one thing that surprised us was that bonds didn’t have that bad a year.”

Small resource stocks had, in McDonald’s words, “a shocking year” – losing 44 per cent of their value between January and November.

“Materials and resources generally didn’t have that great a year,” McDonald said.

Telcos and banks had a good year as investors seeking yield continued to favour the income stocks.

“What maybe surprised people was how strong consumer discretionary was, given all the talk about retail sales, people not spending money and retailers complaining about the GST on imports,” McDonald said.

“Their share price has had a big bounce.”

Heading into 2014, McDonald urged caution in equities, with a pullback likely due when the US finally winds back its stimulus program.

“We still think equities will do okay, probably not as strong as this year,” he said.

Offshore remains the preferred investment choice, with the outlook for Australia described as “fairly flat and boring”.

McDonald said Australian equities are expensive compared to offshore choices and expressed concern about the earnings outlook for local companies.

Credit Suisse sees European equities as a good option, with improvements in business activity, falling house prices and reduced current account deficits pointing to better conditions on the continent.

China, where reforms are lifting growth and services have now eclipsed the industrial sector as the biggest contributor to GDP, remains an investment favourite.

“China is one of our top ideas for next year,” McDonald said.

AMP’s Oliver expects equity returns to remain positive in 2014 but thinks they will slow down, with Europe also the favoured investment destination.

Oliver said Australian shares are no longer cheap.

“The easy gains are behind us so you have to be a lot more careful when undertaking asset allocation.

“Some markets are still quite cheap – Europe for example stands out,” he said.

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