Should we be prepared to accept lower returns as global stock markets capitulate, Bond yields decline, and a potential Housing bubble has priced the cost of property in Sydney and Melbourne beyond the first home buyer and into the echelon of high net wealth investors?
You would be forgiven for being worried about how to make extra money through investments as global economies are slowing down. The International Monetary Fund (IMF) has advised us through their recent release of the World Economic Outlook (WEO) that global growth for 2014 has been revised down by 0.3% to 3.4% for the year. This is despite a continued expectation for global growth in 2015 at 4%.
When you evaluate these numbers in relation to inflation, there is a very low ‘real’ rate of return to be made.
Investors have been speculating that central banks could start lifting Interest Rates sooner rather than later. US investors have driven the greenback higher in recent months in anticipation of a move in the first half of 2015, while Australian investors are still perceiving a rate change in the later stages of next year.
Higher interest rates mean a better return on cash investments with the bank.
At the same time, however, rising interest rates have a negative effect on Bonds – one of the lowest risk investments. Rising rates reduce the value of existing bonds, and over the last year, investors have been flocking to bonds in an effort to find higher/lower risk rates of return. Still, the Australian 10-year Bond rate is currently at 3.26%. Not too bad considering the IMF’s economic outlook.
What happened last year?
The stock market experienced a phenomenal 2013 return. The ASX200 index, considered the leading benchmark for the Australian Stock Market performance, gained 14.9% for 2013. This is greater than any of the long-term averages, but Year to Date 2014 has failed to meet continued high growth expectations. Thus far, as at Wednesday 22nd October, and following a strong short-term rally in the last week, the ASX200 index has scrapped together a 0.5% gain. With a little over two months until the end of the year, we will need to see a sizeable return to match the long-term average, let alone to match last year’s performance.
Booming property is certainly lacking the heyday from before the GFC. Although rental returns remain solid, well maybe not for Sydney and Melbourne where property values have skyrocketed, annual rates of return have slowed despite extremely low interest rates. And without booming property, the rest of the investment world bunkers down and holds onto cash.
International influence on the Australian economy also has investors worried. Chinese demand for natural resources is a direct impact on our Resource sector. A declining Australian dollar against the greenback has increased international investor returns far quicker than a booming stock market from 2013. Hence, we have an exodus of international investment capital. While declining commodity prices have cut margins for international exporters, reducing their profitability and subsequently their earnings growth.
So where can I make a reasonable return?
Well firstly, what you consider reasonable may not be worthwhile to someone else. However, according to the IMF, US economic growth is expected to continue outperforming global expectations. At the same time, although China has almost halved their annual GDP growth rate over the last several years, current figures of 7.3% are still outperforming nearly all the developed nations in the world.
Both of these countries can be traded through Exchange Traded Funds, or ETFs. Although a fledgling market in Australia (traded through the Australian Stock Exchange), ETFs are a booming market in the US. In fact, many direct investors are using ETFs more than Funds management as they can gain exposure to the same stocks/markets/industries as the funds they would normally invest in, but without the same management fees.
Another alternative for stock investors is the Covered Call, otherwise known as the Buy Write, strategy. This strategy benefits from neutral to bullish stock market activity. Although it will still experience a decline should the stock market retrace in value, it is a strategy where Risk is reduce in stock ownership due to selling calls against the position.
If you would like to learn more about ETFs or the Covered Call strategy, you can book in an appointment CLICK HERE