As we approach Christmas and the New Year, how are investment returns looking for 2020? Will they be the same as this year or past years?
The on again/off again/on again trade imbroglio between the US and China has been a feature of 2019. It is still expected to continue in 2020.
But probably more crucial are interest rates. There is much market and academic talk on how low they can go. 2019 saw the U.S. Federal Reserve (their Central bank) move from rising rates to 2.50% in early 2019 to then decreasing rates to 1.75%. The Australian Reserve Bank says their next move is also another cut after two drops this year. We have gone from 1.50% down to 0.75% – a record low cash rate for Australia.
The effect this has on investors is one of ‘chasing yield’. Investors are moving out of cash where returns are below inflation, so a negative return in real terms, to seeking alternative options – ‘better returns’.
This reaction to move money to higher yielding assets like shares (dividends) and property (commercial rents) may seem reasonable, but it should be measured and not disproportionate to the risk one would normally take. Low interest by definition means the economy is slow or slowing. Therefore companies (shares) and landlords and tenants (property) are struggling or under pressure as spending reduces.
By way of example, the recent tax cuts here by the Morrison Government have not translated to more spending. As the Financial Review reported, “Josh Frydenberg has had to reframe the government’s narrative after it emerged that much of the money from its tax cuts was put towards debt or saved rather than spent.” So if people have more in their pocket and don’t spend it, then investing in ‘growth assets’ like property and shares that rely on people spending money may not be the answer. One reason why share prices rise is the volume of money pouring into the market looking for a better home, and not necessarily because the market is ‘good value’. A bit of FOMO.
What then is the answer?
Simple question, hard answer.
Probably a better way of asking that question is, “what options should I look at without increasing my risk?”
That’s the fundamental point – risk. If you are uncomfortable with risk and have had money in cash and term deposits, then by nature you are risk averse. So you shouldn’t replace your cash with property and shares. Perhaps look at a small allocation of your money in those assets.
Similarly if you are a share investor and have a greater tolerance to risk and you feel the shares you own have lately ‘not performed’ (like the banks and industrials), it may be unwise to replace your blue chip portfolio with tech stocks.
So as stated above, a better course of action is a measured approach that is not disproportionate to the risk one would normally take.
However, before one takes any action, perhaps a look at investor fundamentals is appropriate.
At Rothgard, we spend a deal of time uncovering what it is that clients are trying to achieve. If the answer comes back as ‘a good return’, we find that answer too superficial. There’s no Emotional context to that answer, it’s an Intellectual response.
In helping guide our clients to set themselves up for a happy retirement or paying off their mortgage earlier, it’s that Emotional factor we discuss first. Then comes the money or the Intellectual side.
So if you feel interest rates are too low for you or your shares aren’t performing, perhaps we should discuss why that’s important to you – emotionally.