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The (desperate) pursuit of better returns

19 August 2014  |  Investing

desperatePerhaps the most tricky investment judgement at the moment for SMSF investors is how to respond to low interest rates. On the one hand, it creates an incentive to look at other assets. But so is everyone else, so there is a risk that those assets are overvalued.

Low interest rates have become a real problem, as they are now falling, in some cases, below inflation, meaning you are actually going backwards. The AFR describes the issue:

"In recent years bonds and cash have been good sources of income with returns of 6 per cent, particularly for yield-hungry investors such as those in or close to retirement.

But as the global hunt for high yield investments has gone on, the prices of most assets has gone up – notably bonds, equities and property – and in an environment where future growth is less than certain and volatility levels are expected to increase.

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With almost everything correlated to the economic drivers of return, finding truly risk-free, uncorrelated assets offering good returns is a bit like hunting for unicorns, says MLC’s head of investments Susan Gosling.

“It is a very difficult environment in which to control risk because central banks have really taken away safe assets for us. Part of the redistribution of wealth from savers to debtors has taken away the opportunity for having a safe investment,” she says.

Central banks around the world have been cutting interest rates in an effort to stimulate economic growth. At 2.5 per cent the Australian cash rate is one of the higher global offerings but with the inflation rate at 3 per cent there is the real prospect of zero returns."

Because of the financial markets' greater sophistication and the massive increase in activity, these markets are tending to move in unison, making it harder to genuinely diversify. Many investors are looking at property, but as the Canberra Times points out, this has the danger of excess, of buying into an overheated market:

"Booming double-digit house price growth could screech to a halt, according to Stockland, one of the country’s biggest residential developers, which is now forecasting rates of growth closer to 1 per cent.

…while population growth and undersupply would underpin demand, he expected that the pace of growth in prices would slow, allowing the development of more affordable houses and apartments.

‘‘We don’t expect the rate of price increases we’ve seen in the last 12 months [of between 10 and 11 per cent] to continue at that rate,’’ Mr Steinert said at the release of the group’s full-year result on Monday."

There is of course no simple answer to these issues. The stresses created by the GFC are still with us. Although Australia has been much less affected, it has not been immune.

Here is a graph of national house prices versus finance:

This is growing much faster than economic growth and four times wages growth. It does suggest that investors are getting very eager indeed to find different options.

 

 


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