What a difference a year makes. This time last year were looking at losses for many investors while they struggled to reconcile the outlook for rising interest rates, especially in the U.S., just as concerns around global growth began to surface. This led the US Federal Reserve to dramatically reverse their policy leading into 2019, with the lowering of interest rates and extraordinary gains in the major share portfolios across 2019 as a result.
You may have heard a lot about lower interest rates in the news and the impact of this should not be underestimated. Central banks are lowering rates because the global economic environment has weakened and the outlook has deteriorated; which suggests that this positive outlook may be misplaced longer term.
Interest rates are determined by the rates set by central banks, like the Reserve Bank of Australia, which cut rates again recently. But, we should also look at the long term interest rate on bonds issued by governments around the world, especially those from Australia and the United States. U.S. 10-year bonds were more than 3.2% at the beginning of the December quarter, last year. Now, it is barely half that. These moves have significant implications for how investors value such things as shares and bonds.
Locally, the Australian government 10-year bonds are at ~1.0% and this is near record lows. This is approximately one-third of what it was twelve months prior, with increasing talk suggesting that Australia may see some form of ‘quantitative easing’ (or ‘money printing’ to try and get things moving) in the not too distant future. With this, both shares and bonds have enjoyed a bumper period of returns in 2019.
However, while the low-interest rate outlook may persist for some time, the risk of losing money that may never be made back in some of these investments is significant, as investors drive up prices well beyond what we think the fair price is. In such an environment, we could consider holding more cash than normal.
Opportunities to invest do remain, though. Notably, Brexit and ‘trade wars’ developments are very much a moving feast of news flow, but this uncertainty has created the opportunity to buy unloved shares in the U.K. and Japanese share markets which we think will reward your portfolio over the longer term.
As always, please let me know if you’d like to discuss these views, or anything else, in greater detail.
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