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Smacks of Desperation

Despite markets seemingly doing well, the reasons and the current position makes it a difficult time for investors.

The interest rate cuts by the Reserve Bank of Australia have caused investors to push up the price of riskier assets in a desperate search for income. By not only cutting rates, but changing the parameters (there is now a focus on unemployment before we look at inflation) has led not just to low rates, but investors seemingly resigned to the belief that rates will be low for the long term.

The reaction in Australia has been far more extreme than overseas, probably because Australian’s are used to higher interest rates and higher dividends than most investors overseas. We can never know how far distressed people will go, but this is not likely to end well. Investors are ignoring risk which could come from either higher interest rates in the future (even a small increase could be very damaging), or the economy faltering and the risks that investors have ignored eventuating.

While share prices go up in the short term, this is just stealing returns from the future. The future prospects of the businesses have not improved at all, just what you pay and if you pay a whole lot more initially, your returns are going to be much lower, including losses. Momentum can carry markets a long way, but it is hard to justify what Australian stocks are trading at compared to overseas equities.

So, the RBA has put investors between a rock and a hard place. They have three choices:

  1. Accept a measly income return;
  2. Take on more risk than you should and buy other riskier, higher yielding assets (and push them to high prices in the process);
  3. Wait, accept some lower returns for a period and hope we get something to unsettle the momentum to provide a buying opportunity at significantly lower prices.

While there is no certainty if and when the fall will occur (rates could stay low for a decade, but 10 years is a long time and so much will happen that we could not even imagine today), for the investor that looks to avoid significant losses that are hard to recover, you have to be extremely careful and selective buying in these times and it is probably best to take some profits.

At Intralink, we have other options such as investing overseas and access to the range of other investments such as the Australian Unity Healthcare Property Trust which we are able to buy at net asset value as compared to listed property trusts trading at a 30% premium to the net value of the properties (value minus debt).

We are constantly looking for new options and opportunities, so we can help clients generate decent returns, while not leaving you exposed to the downside that many investors do not know they are exposed to.

For further information or to discuss how we can help you, please speak to your adviser.

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