The last few years since the GFC have been difficult for investors – each time sharemarkets take a step forward, any bad news relating to the global economy, especially within regarding Europe, pull them back.
ipac co-founder and Executive Director Paul Clitheroe joins Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, to provide their views on where sharemarkets are placed and how to navigate the period ahead.
Click below to see the video;
your questions answered…
why do investment markets continue to be difficult?
Many investors still have vivid memories of the financial crisis, and continue to react with heightened sensitivity to news coming from various parts of the world – whether it’s the troubled Eurozone, the slow United States market, China’s growth or the value of the Australian dollar. Policymakers are working hard to create a more stable investment environment and the global economy is growing. We remain confident in the medium-term outlook for sharemarkets and share-based portfolios.
why should I keep believing that returns will improve?
Global and Australian companies are generally well-positioned with low levels of debt and high cash flows. Well-known Australian companies such as Woolworths, Westpac, James Hardie and Transurban are good examples. Share prices are also attractive in Australia and overseas. Consequently, when the investment environment is more stable, sharemarkets rise as investors focus on these positive company attributes.
For example, in the first quarter of 2012, the Australian sharemarket was up eight per cent, while the US market was up 12 per cent. Big rises like this often come when investors least expect them. That’s why trying to guess when they will occur is a flawed strategy. By staying invested, you do not miss out when sharemarkets rise helping to get your investment back on track.
what will it take to achieve a sustained global economic recovery?
An important difference between the current environment and the GFC is that the challenges we are facing today are more visible. Developments in three key areas have the potential to drive investor confidence, positively influencing sharemarkets and share-based investments:
- The Eurozone countries must control their debt situation. There has been recent progress, including interest rate cuts, a move towards a common fiscal policy and measures to help troubled banks. Now, the stronger countries must come together to help the weaker ones to borrow at sustainable rates, recapitalize troubled banks and pursue more of a growth driven strategy to help pull Europe out of its malaise.
- The United States economy has to keep growing. In the long-term, the US must reduce its budget deficit, but it needs to make sure that it does not do this too quickly.
- The economies of the emerging countries could lower their interest rates much more than they have done so far. With inflation under control, they can further stimulate their economies, which will also help global growth.
why isn’t the Australian sharemarket doing better?
For the last two years, the Australian sharemarket has gone up, then down – unable to get momentum. The high Australian dollar and higher interest rates have been challenges as have fears about a hard landing in China.
The more recent move to lower interest rates and provide stimulus in Australia and China should help. While the way forward has issues to manage, there is scope for improved performance in the prices of Australian shares over the medium-term given the strength of domestic companies, Australia’s positive economic environment and our close ties to Asia.
am I better off in assets like cash and term deposits?
Cash and term deposits certainly have a key role to play in your investment portfolio, providing the immediate cash flow you need and the funds for shorter-term goals.
But having too much in term deposits may leave you vulnerable to a fall in the income these investments may generate in the future and at risk of missing out on better returns elsewhere. This is something to consider in the current environment as Australian interest rates have been falling since November 2011, with further rate cuts likely.
There are other options that retirees can use to generate income, such as the ipac Income Generator fund. This fund invests in a range of income focuses strategies such as the Australian share market. This market currently has a forecast cash dividend in excess of six per cent and a gross yield (which incorporates the value of franking credits) of around seven per cent. In fact, a bank like Westpac is delivering an income yield on its shares which is approximately double the income from their 12 month term deposits.
Further, the income stream from a strategy that includes shares is likely to grow at least as fast as inflation over time. With shares, you also have the potential for capital growth, something term deposits cannot provide.
what is ipac doing to manage my money through this period?
Our advisers assess your income and capital needs with you and take advantage of investment portfolios built to meet specific needs.
Our portfolios typically invest into a wide range of quality assets, that our investment team believe have the potential to perform well over time. Investments are selected to meet the specific objectives of each portfolio, from protecting your capital to achieving growth or delivering a regular income stream.
In the short-term, investment markets are driven by changing expectations and shifts in investor sentiment. We believe that the current reaction to disappointment creates investment opportunities for those who do not believe the global economy faces inevitable disaster.
Over time, it is the fundamental condition of the aggregate global economy and companies has a more important impact on market performance. Therefore our approach seeks to exploit longer-term trends in markets.
If you have any questions or concerns, please contact your ipac adviser to discuss your strategy at any time.