Is there upside in the Australian Markets in 2012?

extract from Morningstar 

European sovereign debt, lacklustre global growth in Developed markets and persistent reporting about market falls doesn’t look promising for an increase in Markets.

What does one do…. Stash cash in mattresses?

A recent Panel at a Property Council of Australia lunch with Morningstar head of equities research Peter Warnes, PIMCO head of wealth management Peter Dorrian and Investa group executive Michael Cook gave an indication that there was significant upside in the Australian Marketplace.

"No matter how dire markets are there is always opportunity, and  Australia is one of the few places investors can get compensated for any equity risk.” Said Warnes

"Australia has very robust terms of trade, an investment boom in infrastructure and the resources sector, a competent monetary policy, and a manageable level of debt. Our companies have good balance sheets and we are attached to the epicentre of positive growth that is China and India" Warnes says.

Warnes continues to like companies with sustainable dividend yields, such as Woolworths (WOW) and Wesfarmers (WES).

He acknowledges Australia may be too exposed to China, but also notes the continued growth in India that provides Australia with another growth prospect.

"Let's not forget that India is 15 years behind China. With a huge population, it has a hell of a lot of buying power," Warnes says.

As an equity researcher, Warnes obviously prefers equity to debt transactions, noting that while Telstra (TLS) managed to successfully raise 470 million euros in debt in two hours, at 3.5 per cent "you might as well invest in the stock and get a 9 per cent yield".

PIMCO's Dorrian has a slightly different view on bonds, believing 10-year US Treasury bonds at 2 per cent are an appropriate investment.

"Sitting in Australia, these bonds are still an appropriate investment on a fully-hedged basis (in Australian dollars). Investors can still pick up the interest rate differential. In the US, interest rates are effectively zero and in Australia they are 4 per cent, so investors are essentially getting 6 per cent yield," Dorrian says.

Cook can't help but be optimistic, particularly given Australia's relative economic strength compared to other developed markets.

Any slowdown will be beyond his control: "If the world turns to turd, well, the world turns to turd. There is nothing much we can do about it."