Earlier this year I wrote Australia’s bull trap which defined the period ahead for the Australian economy as one of “financial repression”. While the reflexive defenders of the status quo wheel out their hackneyed rationalisations for why Australia is different, the sharper operators in the MSM are beginning to sense that this change is upon us for the long term. The pick of those early movers (in the relative MSM sense of “early”) is David Bassenese at the AFR who penned a piece over the weekend asking the the right question: “how to invest in a low-interest world”.
Bassanese’s get’s it more of less right in arguing rates will be lower for longer before looking at stocks:
Much lower returns on cash have compelled deposit holders to move into the sharemarket for income.
…Brendon Alford, a fund manager at Whitehaven Private Portfolios, says low rates are a double-edged sword for bank stocks.
“[The shares] tend to perform better because of that interest rate differential but from a business point of view it makes life tougher,” he says. “We’ve had the rotation of people going into banks for the yield which has pumped up share prices. On the flipside, if interest rates are low it generally means the economy’s not doing so well and the economic growth’s not there, making it difficult to grow their business.”
That’s about right. Yields are OK but do not justify the risks of the shakeout. And property:
After softer price growth, the rate cut was met with relief in the housing market. Economists had tipped a gain of about 1.8 per cent in the first quarter, but Australian Bureau of Statistics figures on Tuesday – the same day as the RBA announcement – showed prices nationally rose just 0.1 per cent after strong gains late last year.
…Australian Property Monitors senior economist Andrew Wilson says while investors generally will be more active, first home buyers are likely to save for longer and amass bigger deposits.
Correct. Expect below average returns on property with an even worse risk/reward trade off. On bonds:
“This is a never-before-seen interest rate cycle, so don’t assume it will continue,” says Australian Unity Investments chief investment officer David Bryant. “Rates will turn and anyone holding long-duration bonds will get out and there will be a capital loss.”
On the contrary, you can assume it will go on and on. The Australian dollar is going to have to fall much further. If that presents an inflation problem and the RBA reacts to it, the dollar may rally a while before collapsing again as the rate hikes succeeds in killing the economy.
As radical as it sounds, more likely may be an outcome of the RBA “looking through” the imported inflation for an extended period – either officially or otherwise – in which case the risk to bonds is not a rising cash rate but still rising bond yields as capital exits the country.
On cash:
According to online comparison site RateCity, a year ago the average 12-month term $50,000 deposit earned 5.2 per cent, compared to 4.12 per cent now. That’s a drop of 1.08 percentage points. Slightly more competitive are three-year term deposits.
…“If you are lucky you might get 4.2 per cent for a term deposit but it is dropping and sooner or later you have to face [that] you are not generating returns on your money,” says Australian Unity Investment’s Bryant.
No, but you will be ensuring the return of your money. If this cycle becomes a muddle through event, cash will do OK, the falls in the yield on bank assets will be faster than the yield on liabilities. Banks will need deposits and will pay for them. If it turns into something worse then cash returns will fall but not capital as will be happening in all other asset classes.
On gold:
AMP’s Oliver…rather brutal opinion is that gold has done its dash. He feels its failure to recover to at least 2012 levels despite Europe’s gloom and doom suggests it has seen its highs and it will trend down as the global economy gradually mends.
Gold is a $US play. Given the US economy is recovering slowly but surely and stability is returning to fiscal policy, gold will struggle to rebound. If monetary policy is tightened it will struggle even more. The question that needs to asked is will falls in the Australian dollar outpace those in gold if the US continues to improve? My guess is no but the upside will be larger in US dollars or other currencies than the yellow metal in such a context.
So, I reach the same conclusion that I did when interest rates began to fall. The highest term deposit rates for longest durations are the safest risk/return income bet. Risk capital should aim to play the falling dollar via shifting offshore or through quality dollar-exposed Australian industrial stocks. The higher the exposure the better.
Above all, prepare to be repressed.
