MoneyMag

COVER STORY

STACK.7

YOUR HAND WITH I litACES

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Australia's

economic news continues to bepositive. Interest rates are on hold andthe unemployment rate is low. Throw in

a record breaking Aussie dollar, a recovering USeconomy and global disasters and you have someamazing investment opportunities. It's worththinking about diversifying into these hot sectors.

Money asked five experts for their best picks andto share their wisdom. Resources guru Dr AlanTrench explains his passion for junior resourcestocks, precious metals ETF expert Danny Laidlershares his strategy to take advantage of the riseof the silver price and currencies strategist KaraOrdway tells you why she thinks the Yen will gainground. Property specialist Chris Gray gives histips on negotiating the best price for quality realestate and renowned US stock picker Joe Forstergives his best buys in US shares.

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Ref: 101464390Copyright Agency Limited (CAL) licenced copy

Money MagazineMay, 2011Page: 34Section: General NewsRegion: National, AUCirculation: 50188Type: Magazines BusinessSize: 2,966.92 sq.cms.

Page 1 of 7AUS: 1300 1 SLICE NZ: 0800 1 SLICE [email protected]

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RESOURCES All about your risk profile

Youreditor found me in a good mood

the day she called me to guide Moneymagazine readers to "what's hot" in

the resources sector. Why? On the day, onestock in my portfolio was up an impressive89% (March 25). As I sat down to write thisarticle, however, that same stock was firstdown 14% and then up 17% during the nextday's trading before finishing unchanged.

The stock is Newland Resources (NRL),which stirred strong market interest viadrilling results from new coal coking seamsin Queensland.

Low-risk investors targeting the resourcessector should stick to BHP Billiton (BHP), RioTinto (RIO) and Woodside Energy (WPL) -simple as that. They're all great companiesand each has an enviable project pipelinefor growth.

Higher-risk investors should target smallerresources companies however. The two-daymarket experience of NRL described above is

BEST FMKHere's a freebie for read-ers. Subject to sharehold-er approval at a general meetingin early May, Navigator Resources(NAV) shareholders will receive afree in-specie distribution of sharesin new initial public offering (IPO)Kimberley Rare Earths (KRE) ona 1 for 20 basis. The entry price,of course, is to own NavigatorResources shares before the recorddate for the distribution, set forMay 16, 2011. I am the independ-ent chairman of Navigator, so I willbe taking up my free shares, andsubscribing around $50,000 to thenew KRE float also.

a useful example: it provides lessons to would-be investors in the junior resources sector.

Firstly, while the resources sector is "hot"overall, the day-to-day returns at the juniorend of the sector can be extremely volatile.

Those investors wishing to gain exposureto the emerging resources sector, therefore,need to be comfortable with such higher risk- meaning that shares will go down in price(and significantly on occasions) as well as up.

Next I should communicate that the 89%gain described above was the result of nearlytwo years of patience. I first bought into NRLat just lc in a private placement back in Sep-tember 2009. It is now trading at around 15c,recording perhaps the best "14% gain" I haveever made. Mathematics was never my strongsubject at school.

But seriously, the re-rating of NRL didnot just occur in one day - it has taken over18 months to accrue, much of that time with-out the headlines that accompanied the drill




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results and consequent share price gains oflate March.

I cannot emphasise this latter point stronglyenough. Profits, even in such a hot sectoras resources, take time to accrue. As anindependent board member and adviser toa number of junior resources companies,witness over-impatience among investorsregularly. Some junior resources sector inves-tors expect re-ratings to occur every singleday. That is simply unrealistic.

Having set the scene, this brings me toanswering some key questions.

Where would I put mymoney now?I put it where I have done for many years now- in emerging junior resources companies.Junior companies seeking to develop tin,tungsten, lead, nickel, uranium, vanadiumand rare earth metals could all performstrongly in coming years.

The important provision here is that forthe junior companies to be successful, theymust keep advancing towards production andnot stall - far easier said than done.

Why invest when thesector is high risk?Never before in human history have twodeveloping economies, namely China andIndia, each with more than 1 billion people,reached the metal-intensive phase of theireconomic development at the same time.

As stated, however, junior resources sharescan be risky. Personally, although I hold noshares in any other ASX sector aside fromjunior resources - I do however maintain amodest property portfolio to diversify risk.

What are the main investment drivers?China - and, to a far lesser degree at present,India. This is not to ignore the steel-inten-sive rebuilds required for the recent naturaldisasters in Queensland, New Zealand andJapan. The reconstructive efforts for eachof these regions are seen as a positive interms of steel and steel-alloy markets overthe coming year; however, the main driverremains China's growth.

In steel China is on track to consume 1 bil-lion tonnes of steel a year by 2020 - withpositive implications for Australian ironore and coking coal seaborne trade exports.

China's economic and industrial growthis subject to volatility just as for any oth-er country - but the trend is onwards and

upwards for the balance of the next decade.As an aside, the benefits of China's growthare not confined to steel. In frastructurebuild-out and urbanisation is particularlypositive for copper and aluminium markets- and vanadium, niobium, rare earth metalsand lead and zinc too.

Elsewhere, there is uncertainty over ura-nium's future as a global clean energy source,given the unfolding Fukushima crisis.

Here again, however, the main driver isChina and not Japan. Over the next decadeit is possible China will do for uranium whatit has done for iron ore this decade; that is,drive miners to the point where they cannotmine sufficient quantities to satisfy demand.

On to oil and gas: Clearly any escalationof violence in the Middle Fast and NorthAfrica could drive near-term prices higher.In the longer run, however, the oil pricetrend is also upwards. "Peak oil" is a loom-ing issue (where world oil production beginsto decline in absolute terms) and is no doubtbeing discussed already in the boardroomsof both major oil companies (the produc-ers) and mining companies (oil consumers).

In a nutshell, the world requires over 80 mil-lion barrels of oil a day - and an 80 millionbarrel new oil discovery is not made everyday. Any junior who has an exciting oil pros-pect and who makes (or shares in) a signifi-cant discovery will fare very well indeed.

The outlook for gas is not so bullish, par-ticularly for juniors exposed to North Ameri-can markets. Whereas some years ago theHenry Hub (North American gas benchmark)traded at a premium to other gas markets, itnow trades at a discount to prices elsewhere,given the plethora of onshore gas discover-ies in the US in recent years.

DR ALLAN TREN

TV Allan Trenchla is the author ofseveral books, 'Delud-ing A Sharebtryer'sGuide to Investing inhe iditestpalian

in Soom. Allan is anindependent directorof a number of emerging ASX-listectresources corrlwles and als0 adjunctprofessor at the Western AustralianSchool of Mines.

PROPERTY:How to find areal bargain

Everyone

wants a bargain but, remem-her, the number-one rule of propertyinvesting is finding quality proper-

ties. The good news is we are currently ina buyers' market. The combination of morestock on the market and a slight uncertaintyin the economy, which causes some buyersto sit on the fence, means you have a higherchance of grabbing a blue-chip property fora slightly lower price than at another stage inthe market cycle.

If you buy and hold on to a blue-chip property,you can build up equity as its value increases,borrow against it and build up your portfo-lio. Blue-chip property values typically growbetween 6% and 10% a year in the long term.

If you were to buy for $650,000 today itwould be reasonable to expect the property tobe worth $689,000 in one year on 6% growth.Looking at 10% growth, you could expectthe property to be worth $715, 000 - a profitof $65,000. As property values often doubleevery seven to 10 years, this is the real bargain.

Picking your suburbResearch the market, talk to real estate andbuyers agents and use resources such as prop-erty research houses to decide which suburbsor properties are undervalued in your area.




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The research houses always give good ratingsto inner-urban suburbs such as Albert Park,Middle Park, St Kilda, Elwood, Elsternwick,Prahran, South Yarra, Armadale, Hawthornand Richmond in Melbourne and Sydney'seastern beaches from Maroubra to BondiBeach, the inner-west suburbs Leichhardt,Annandale and Ba linain, and north shoreha rbourside suburbs including Neutral Bay,Kirribilli and Cremorne.

Buy a bargain, renovate, andwatch your wealth growIn November 2008 my company paid $620,000for the last outstanding unit, to own a smallblock of seven at Coogee on Sydney's easternbeaches. Coogee fits the bill for investors: it isclose to the CBI), where professionals work,and has all the leisure facilities professionalslook for: bars and restaurants, shops and, ofcourse, the beach.

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In less than two years the units were val-ued at $800,000. We are now going throughcouncil to double the size of the block, renderit and extend balconies, which will add tre-mendous value to every unit.

Internally we're likely to also spend $70,000on it, which should see its value increase afurther $100,000 to $120,000.

I always outsource renovations to a profes-sional who can manage everything, and willget the job done to a very high standard veryquickly. This requires an upfront spend butthe property will be ready to lease or resellfar sooner, so you can realise the capital gainson your bargain buy.

I didn't buy the property cheap, but the priceI paid is now cheap compared with if I hadbought it after the work was done.

Negotiate to get the best priceWhile quality is usually priced at a fair market

WHAT'S HOT NOW

"ST me-41,For those with their heart seton finding the latest hot spotas well as staying blue chip,some tip Maroubra as the findof Sydney's eastern beaches.In Maroubra buyers can findproperties around $100,000 cheaperthan at the neighbouring beaches.Developers and renovators are mov-ing into the area and, with more andmore people recognising the sub-urb's merits, Maroubra could repre-sent a rare chance to find a bargainin the Sydney market - but you willneed to get in quickly.

value, there are steps to understand the mar-ket and get property at a slightly better price:

Silent sales: Invest time in building upindustry contacts or a buyers agent whoalready has contacts and will be in the knowabout properties before they hit the market.

Auctions: Auctions can be a great placeto find a bargain but they can also be a greatplace to get caught out and pay well above theodds. There will always be another propertyso keep a cool head, stick to your price limitand be prepared to walk away.

Timing: It is possible to get a bargain bysimply having a signed contract and deposita few hours before someone else. Agents lovethe peace of mind of a guaranteed deal.

Big picture: Amateur buyers can becomeso emotionally involved, or get so caught up inthe minor details, they lose sight of the biggerpicture and pay too much. Always keep yourprice limits and long- term goals in mind.

CHRIS GRAY

ChrisGray is OM

of Empire whichbuilds property port-folios for other people- searching, negotiat-ing and reriov,otingon their behalf. Chrishosts Your Money,Your Caireach Friday on Sky News ausi-ness channel. Chris is an accountantbuyersagent and 'mortgage broker. Formore visit ihnivvo.chrislrayroom.au.




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Whetheryou are a foreign-exchange

(FX) day trader, a company ownerwho deals with foreign currency,

a prolific buyer of overseas goods, or simplyplanning your next holiday, all of us are affectedby the movements in the Australian dollar.

While picking up my US dollars at Sydneyairport for a recent holiday, I found out theharsh reality that its all in the planning, nomatter how small your currency trade is.

After a hectic week at work seeing the Aus-sie dollar dip and rise, I was a bit surprisedto see the disparity between the underlyingmarket and what money exchange companiescharge. When I left the office the $A was trad-ing at around US97.07e, but the rate I got fromthe money changer %'as only US89e. A weekand a half later it was trading at $US1.03 andhigher in the underlying market.

Hidden costsSo, while we may feel we are enjoying thebenefits of a superior economy with a higherinterest rate, a stronger currency, stable infla-tion and well-managed low public debt, itdoesn't always translate into daily benefitsfor the average consumer. This is due to thehidden costs and fluctuations for the green,yellow, red, blue and purple notes we holdin our wallets. My experience at the airportmoney changer is a common example.

How can we invest and make the most ofthe Aussie dollar to really feel the benefit ofits superior rate against the greenback?

If you're a small import company that buys

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FOREIGN CT TRRENrY!Picking the moment to trade

-11ST "ICHThe Japanese yen will be one towatch as it gains ground directlyafter the earthquake. We saw someextreme volatility in the yen imme-diately after the disasters whenthe Japanese government pumpedbillions into their market. The G7group of nations was also at theready and did not hesitate to inter-vene to ensure the yen's stabilityafter the disasters. We would expectto see large amounts of volatility inthe coming weeks and there will beplenty of opportunities for intra-daytrading for the yen crosses.

most of your supplies overseas, this may be agood time to pay your bills.

It may be a good idea to lock in a price forthat holiday package you've been delaying. Ifyou have children studying overseas, perhapssend some advance funding to their bankaccounts or prepay some of their expenses.

Moves in currency pairs can be fast. Buy-ing something online one day compared withbuying the same item three days later mightmake a big difference to your credit card state-ment. Volatility increases as economic datais released and sentiments change amongmarket participants. Though my outlook for

2011 for the Aussie remains positive, currencymarkets naturally have pullbacks.

Since our first parity party in October2010, we have seen a few such pullbacks - forexample during the Queensland floods andafter the Japan earthquake. We need to guardourselves against these types of pullbackswhen planning exposures to our naturallylong SA position.

How long, how far?There is a perception that FX trading is a short-term speculative activity. But this is not alwaystrue, particularly with the recent $A strengthmaking it an attractive long-term investmentopportunity. The question for many investorsand traders now is: Is this likely to continue,and, if yes, for how long and how far?

We live in a strong economic environ-ment compared with most of the northernhemisphere and the general feeling of globalconfidence has increased the appetite for tra-ditional "risk" currencies such as the Aussie.

An interest rate of 4.75% while the rest ofthe world is hanging around the zero to 0.5%mark makes for a very attractive investmentfor those in the carry trade (this is when youborrow money at low interest and invest it ina high-interest-rate environment.)

The euro continues to be strong, particu-larly with speculations of rate rises to come,though many traders are calling the euro/SUScrossover bought at its current level. Long term,however, I am more bullish on the euro, as Iexpect $US weakness to continue, the Euro-pean Central Bank to announce rate rises inthe short to medium term and inflation pres-sures to continue across Europe.

When trading currency pairs you mustalways be aware what data is being releasedand how that will affect a currency pair.Many traders are focusing on what centralbanks intend to do with their interest rates.

KARA oRnwAY

Ordwm Isa strategist

with City index CASiaPacific.). Kara wasapviinted to 'establishan options tradingdesk In Aiastralia afterserotral years at theCity Index global headquarters in the UK.She is responsible for risk managementof some of City Inclieit's 'high spaLume andhigh yakie trades.




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PRECIOUS METALS: Wait for the sweet spot

Palladiumand silver have been by

far the standout performers in theprecious metal sector over the past

12 months, posting stellar returns of 73% and60%, respectively. Both palladium and silverhave found a "sweet spot" in terms of thecurrent economic environment, as investorsweigh up the potential of further "tail risks"against the sustainability of the nascent glo-bal economic recovery.

Gold and silver are well-known com-modities for Australian investors. Gold'sreputation as the ultimate "store of value"asset has seen the price of gold hit recordhighs in recent weeks, as investors attemptto buffer portfolios against the possibilityof a broad decline in riskier assets such asequities. The multitude of threats plagu-ing the global economy - from the MiddleEast and North African unrest boosting oilprices to the Japan disaster, to the ongo-ing sovereign default concerns in the eurozone - have kept gold prices well supported.

Additionally, with global financial marketsawash with liquidity, investors are againlooking to gold and silver to hedge againstthe potential of declining currency values.Silver, unlike gold, has the added benefit ofbeing used in a wide range of real-worldapplications, allowing industrial demand todo some of the heavy lifting if investmentdemand should slacken.

The hybrid nature of silver has pushedprices to 31-year highs, significantly outper-

HIGH PERFORMANCE

curce.8loorribeukETT Securilirmatt 3o441.-11.

BEST PICKThe silver price has seenorponeritial growth inrecent months. However.it is unlikely that that paceof growth can be sustained in thenear term. If global Indust-jai aCtivitycan maintain its recr_Ivery while risksto global growth linger in the back-ground, a pull-back from recent highsshould provide a niort opportuneentry point into the silver market.

forming gold, as the recovery of the globaleconomy remains in place.

Elsewhere in the precious metal sector,platinum and palladium tend to trade almostas industrial metals, with around 70% ofdemand being accounted for by industrialuses. The automotive sector is the largestsource of demand, with both platinum andpalladium being similarly used for the pro-duction of catalytic converters.

Palladium is used primarily in normalpetrol vehicles (as opposed to diesel) and

its relative strength com-pared with platinum

highlights theimportanceinvestorshave been

placing onthe growth

in car sales inAsia, particu-

larly in China.China is the larg-

est car market in theworld, having surpassed

the US in 2010, and expected growth in thecar market should reinforce platinum andpalladium price growth in 2011.

Traditionally, it has been common forAustralian investors to gain exposure toprecious metals through mining companyshares. The problem with using miningstocks as a proxy for precious metals is thattheir price changes do not solely reflect themovement in the spot price of the metals.They are affected by a host of company-specific factors, apart from the underlyingcommodity price. The result is miners aremore correlated with equity market move-ments generally, rather than the spot price ofthe metal. Another alternative for investorsis to purchase the physical metal.

Buying the metalInvestors' challenges include confirming thequality of the metal, transporting and stor-ing, and insuring it. When an investor wantsto sell some of a holding, they need to finda buyer prepared to give them a fair price.

Investors can gain a direct allocation toprecious metals through exchange-tradedproducts such as ETFS Physical Gold, ETESPhysical Silver, ETFS Physical Platinum,ETFS Physical Palladium or ETFS PhysicalPM Basket, all of which directly track thespot price(s) by holding physical bullion.

HSBC acts as custodian for the bullionbacking these products, and its costs areincluded in the annual management fee of0.4% for gold, 0.49% for silver, platinum andpalladium, and 0.44% for the precious metalsbasket. All are listed on the ASX, so inves-tors can trade them like any other equity.

See disclaimer page 82.

DAM LAIDLER

IJannyLainier is the

head of Australiaarid New Zealand forEIT Securities, withover 12 vea s Industryexperience.. ETF

Securities is the lead-ing pioneer in develop-kixj euthanqe-ttadedomrnodItie5and listed the world's first ETC, GoldEtUlliOn Securities. In London andAustraNa in 2003.

RETURNS RASED ON

V, SPOT PRICL

1Mill MTh LMITH

Gard

Silver EG%

Platinum 1.)%

Palladium 4% 3% 71%

S&P/AS.X200 7% -3%




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COVER STORY

US SHARES: What to buy

TheUS economy is flush with cash but

the money supply has not exceededinflationary growth rates. Higher oil

and food prices are affecting the ProducerPrice Index (PH), but gross domestic product(GDP), capacity utilisation and, most impor-tantly jobs and housing sales are, showingslow but steady signs of improvement.

The US has countered three shock events- political unrest in the Middle East drivingup oil prices, the earthquake and nuclear dis-asters in Japan, and the European debt crisis.The 6% dip in the sharemarket these causedwas quickly recovered. The market has provedresilient and it's a time to buy selected stocks.

Dr Pepper Snapple is the leading pro-ducer of flavoured beverages in North Americaand the Caribbean with more than 50 brands,including six of the top 10 non-cola soft drinks.

Dr Pepper has profit margins at about halfthose of Coke and Pepsi soft drink operations,and its freedom from Cadbury and incentivesto improve margins are the right ingredientsfor the stock price to double. We recommenda buy up to SUS37.51.

iShares Dow Jones US FinancialSector Index Fund is an exchange-tradedfund. The US has the roost flexible economicsystem in the world, and over time the finan-cial sector will recover to pre-financial cri-sis highs. This is a longer-term investmentand you can expect some volatility. Buy upto 5US59.61.

3M is a barometer of global economicactivity, with 80,000 products from sa fetyprotection equipment to optical films foriPod touch screens and Ik:D TVs. 3M has78 manufacturing sites across 28 US states,so the falling US dollar and high unemploy-ment rates make them much more competi-tive, while 65% of sales come from overseas.

The company raised its forecast for 2012 tosales of SUS30.5 billion, and profit ofSUS6.20per share. Buy up to SUS93.13.

Kraft Food and beverage company Krafthas reported a 30% jump in sales to SUS13.8billion, reflecting acquisition of Cadbury.Sales in China soared 74% on the introduc-tion of Oreo cookies. Profits came in line withadjusted expectations at US31c per share, orSUS540 million. The decay in profits wascaused by weaker demand from unemployedAmericans. J Morgan downgraded the stockafter the announcement. Next year crop priceswill fall, employment \all improve and Kraftwill surge. Buy up to SUS31.61.

Pfizer, the world's largest pharmaceuticalcompany, is counting on products from theSUS68 billion Wyeth acquisition in 2009 tohelp overcome sales lost to generic copies ofcholesterol pill Lipitor, the hest-selling drugin the world. Lipitor's patent ended in Canadaand Spain and the medicine will lose protec-tion in the US in November.

The stock price rose otter the announce-ment that they will slash R&D costs from

FtrisT nTryNike is tne worm s number-one maker of athletic foot-wear and apparel, with two-thirdsof the company's sales outside theUS. Nike picked up Umbro in 2008for $576 million, gaining a strongfoothold in the soccer world. In 2012they will replace Reebok as the NFL-branded apparel (the US NationalFootball League). Their stock priceperformed extremely well when theyhad this licence previously. We rec-ommend a buy up to $US77.41.

around SUS9.5 billion to as low as SUS6.5 bil-lion. Pfizer has 17 experimental drugs in thelast of three phases of tests required to seekUS regulatory approval. The stock is moving,buy up to SUS20.38.

Microsoft Handheld devices such asApple's i Pad are revolutionising the way wework and play. Phones and tablets from com-petitors are coming fast and hard. Microsoftis too powerful and competitive and under-valued to be ignored. At 9.2 times June 2012earnings, the stock is undervalued, and ignoredby the raging interest in Apple. Microsoft willcompete. Buy up to SUS25.48.

Oracle supplies software for enterpriseinformation management. Its ma in battleis over data centres that power the "cloud".Oracle, Microsoft and others argue data cen-tres should store servers, storage devicesand software programs. Desktops should heaccess points only. Its time has come due toincreases in bandwidth and speed. Oracle ispoised to take market share from SAP andHewlett-Packard. Keep buying, up to SUS32.02.

J9111111F5TER,

Toe FcwsterkJ is ManagingDirector of fortrendSecurities, which helpsAuslrallan investorsdiversify intosectors not avairabhe InAustralia. His stockselection process has helpedhim beat the market consistentlyfcir the past 15 years.




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