Interest rates are likely to remain low; Average returns on Growth assets are likely to be constrained; in the absence of an external shock Share markets should continue their long term upward trend, albeit at a more modest pace.
We are now in an extended period of slow economic growth, with the IMF Global GDP growth forecast at around 3.5%. This will make it more difficult in identifying investment opportunities, with subdued returns across all asset classes. There have been a number of factors contributing to this muted growth, most stemming from the GFC (Global Financial Crisis);
- · Loss of confidence – consumers are paying down debt, and saving instead of spending; businesses are less likely to undertake capital investments, seeking more productivity from existing assets.
- · Put another way, the increase in consumer debt has slowed resulting in a slower growth in consumer spending. Growth in Business debt is also slowing as businesses strengthen their balance sheets; reducing capital spending impedes productivity growth.
- · Reduced capital spending also inhibits employment growth leading to persistently higher unemployment rates.
- · Plus, a series of economic and natural disasters followed by the recent uncertainty over the China growth story, falling resource prices, and the US interest rate decision have all served to exacerbate the above loss of confidence.
What can we expect as a result of slower economic growth?
Low inflation as constrained spending keeps prices low; Low interest rates which are required to boost growth and use up spare economic capacity; and, a low risk of a global economic downturn.
The positive, from an investment perspective, is that we are likely to see an extended period of growth in share markets, although with higher than normal volatility. As mentioned in the September article “For a Bear (extended falling) market to occur there has to be a fundamental reason typically when countries, in particular the U.S., fall into recession. Some but not exclusive pre-cursors to recession are over-valued asset prices, high employment, high inflation, followed by significant monetary tightening (Central Banks increasing interest rates). As discussed above none of these pre-cursors are currently evident.
The problem for investors in this market is that they inherently gravitate to traditional ‘safe havens’, whether it is cash and bonds where currently returns are low with the chance of capital loss as interest rates eventually start to rise; chase ‘blue chip’ stocks bidding them up beyond fair value; or ‘bricks and mortar’ where returns are highly reliant on robust research, as mentioned in last month’s article.
In investing there are no easy picks or sure things, as with every important decision, research; a sound strategy; and commitment, are the key factors. As investors we subscribe to a broadly diversified portfolio containing all of the major asset classes, in a low growth/return environment the allocation to each asset class is fundamental.
As with any investment decision one should seek advice from your professional adviser before investing!
Important note: While every care has been taken in the preparation of this article, MMT Financial Solutions (ABN 40 147 903 526, AFSL 458115) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.
