It’s a tough market but it can deliver

Investors need to don a hard hat and grab a pick.

That’s not a suggestion to go and join the well-remunerated ranks of the miners, even if they are the reason Australia has one of the few 4 per cent-plus gross domestic product growth rates in the developed world.

Rather, the hard hat is advisable to deal with the short-term hits you will almost certainly take as markets lurch along in what Russell Investments calls a “risk on-risk off” fashion.

The pick will be needed for the hard work of extracting positive returns – which can seem elusive as those goodies at the bottom of the Skill Tester arcade machines, whose flimsy robotic arm we’ve chosen to illustrate our investment guide. Consider the pages ahead a grip-strengthening exercise.

As Damon Frith points out in his guide to the best blue-chip stocks (“A fistful of feisty blue chips”), the Australian sharemarket lost money in 2011-12, yet 14 of the top 100 stocks produced a return above 20 per cent.

He also surveys the opportunities in global equities, where the negative returns of 2011-12 were made even worse for unhedged investors by the appreciation of the Australian dollar.

At least a currency shock is more likely to be in the unehedged investor’s favour in the medium-term and global markets still offer a range of sectors far broader than those on the bank- and miner-dominated ASX.

There isn’t too much good news among the small caps and micro caps and Tony Featherstone (“Small caps for the long-sighted”) admits it will be at least 18 months before an investment today will bring any joy. Nevertheless, these lower reaches of the bourse list some great companies at bargain prices for those prepared to dig around.

Extracting returns from the property market used to be as simple as squeezing gently, at least from 1998 until last year. However, as becomes clear from Nassim Khadem’s interviews with successful veterans, investing in a post-boom property market requires a good eye for long-term trends and the patience to follow that strategy. You can’t be too leveraged, either, as banks are insisting on higher deposits than they have in years, see “Invest like a property hotshot”.

The hard slog isn’t just confined to picking assets – as David Chaplin reports (“New rules light dark corners”), there are a swathe of questions you need to be asking your financial planner in the light of new Future Of Financial Advice (FoFA) regulations.

The death of Barton Biggs, the legendary hedge fund manager who was among the first to predict the dotcom crash, reminds us that low-return markets are a time to think differently.

Schroder Investment Management certainly is: it’s broken a habit of many years and last quarter invested in a gold stock, Newcrest Mining.

The explanation of why by Schroder’s head of Australian equities, Martin Conlon, almost reads like a manifesto for changing one’s mind.

“Having pilloried gold companies for some time, we owe an explanation,” he says. “Valuing gold is almost impossible. It has value only in so far as others accept as it having value in exchange. In this function it is obviously similar to money. By deduction, valuing a company which sells gold doesn’t become progressively easier, or more scientific.

“Our rationale for purchasing exposure to it lies in the uncertainty over how investors will react in the event that the enormous pool of assets known as the bond market can no longer be artificially sustained. If investors lose faith in the ability for wealth to be sustained in these ‘risk free’ assets, they will seek refuge elsewhere. Gold may be one of these ‘elsewheres’.

“In addition, the gold price reflected in the value of many gold equities has retreated sharply over the past year, such that valuations of stocks such as Newcrest Mining can be justified on gold prices well below current levels. We continue to have a strong preference for businesses selling goods and services with greater utility, however, with ‘tail risk’ at undoubtedly elevated levels, we can see value in buying some sensibly priced insurance.”

Some money to be pulled from the bond market may end up in shares. The doomsayers should remember that shares almost always outperform bonds and cash over any given 20 year period. In the two decades ending June 30, Australian shares returned 8.8 per cent, versus 7.6 per cent for bonds and 5.7 per cent for cash.

Those declaring it’s “different this time” and that investors are abandoning shares for good, led by risk-averse baby boomers, should learn a lesson from the magazine Businessweek.

One of its 1979 covers famously declared “The Death of Equities”, arguing that investors had turned their back on shares after a decade of poor returns. Markets proceeded to rally strongly through most of the next two decades.

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