Investment Strategy - Part 1: Bracing for Quantitative Easing

investment strategy

Peak performance is also about coming down the mountain well.

By

Paul Ashworth, Managing Partner
David Clark, Director
Tristan Bowman, Manager


Posted 15 January 20

Peak performance is also about coming down the mountain well.

2019 was a remarkable year, with almost all asset classes delivering positive returns to investors despite some ominous signs at the end of 2018. As we enter 2020, equity markets are at all-time highs and yields have compressed to all-time lows. In this environment we have identified four key themes for investors to monitor in our five-part investment strategy guide.

Theme 1 : Bracing for Quantitative Easing

You can checkout anytime, but you can never leave – the harsh reality of a low growth, low rate environment.

For much of the past decade since the Global Financial Crisis (GFC), the rest of the world has suffered with low and negative interest rates, and the distorting effects this has on retirement cashflows, asset pricing, and investor risk creep.

Australia, on the other hand, has been relatively fortunate to have interest rates that whilst low, were significantly higher that other developed countries and on parity with net dividend yields from equities.

We believe that the RBA is now on ‘autopilot’ towards Quantitative Easing (QE) that will be triggered once the cash rate falls to 0.25%. Unconventional monetary policy can take many forms, varying from the simple forward guidance at one end of the spectrum to negative interest rates at the other.

The likeliest form of QE in Australia will be the on-market purchase of government bonds, in the hope that a lowering of yields will stimulate government sending, lower the AUD and reduce cashflow pressures.

The effectiveness of unconventional monetary policy is debateable. We see mounting evidence that near-zero yields leads to increased risk-aversion by individuals and corporates, rather than increased spending.

As a country with a higher proportion of self-funded retirees – due to our unique superannuation system – the potential for QE to raise household spending and corporate investment appears limited. For investors, QE has the potential to drive an upwards re-rating in market valuations as income investors are driven into high risk asset classes.

RBA Cash Target and Futures Pricing

Diagram showing RBA Cash Target and Futures Pricing

Peace of Mind Investing

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.