Investors should stick to long-term strategy despite volatility

by Shane Oliver

(AMP Capital)

Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital, discusses global growth, rising interest rates, the mixed housing market and his top tips for investors over 2017.

Key points

  • Central banks have indicated the end of ultra-cheap money. Despite the turbulence, investors should stick to their longer-term investment strategy and stay the course.
  • Don’t be concerned about rising interest rates – they’re a sign of global growth and market conditions won’t change overnight. The process will be gradual and low rates are here to stay for a while.
  • Australian housing data is mixed, and the outlook depends on where investors look. Household debt is broadly going up and banks have introduced measures to curb this. However, good news comes for first time buyers in Sydney and Melbourne as both markets have started to cool off.
  • Growth assets remaining promising whilst rates remain low. Geopolitical events can cause distraction and volatility, but they don’t tend to have a lasting impact on investments or portfolios over the long term.

Global rates are rising. What should investors expect?

Volatility returned to the market over July as central banks beyond the US indicated the end of ultra-cheap money. Whilst the recent market turbulence may distract investors, it’s important to stick to a long-term strategy and stay the course. After all, rising interest rates are a sign of global growth and market conditions didn’t suddenly change overnight. Despite indications from the central banks – rate hikes will be gradual and coordinated. The Reserve Bank of Australia’s (RBA) July decision to keep cash rates on hold indicates low rates will be around for a while.

What does the latest data suggest about Australian housing?

Australian housing data is varied and the outlook depends on where investors look. There’s a tendency to focus on the overheated Sydney and Melbourne markets, but over the past year, values for houses in Perth have fallen by 4.2 per cent whilst Darwin tumbled 8.8 per cent. Elsewhere, values went up 1.2 per cent in Adelaide, down by 4.8 per cent in Hobart and remained flat in Canberra.
Despite the mixed data – household debt is broadly going up. Consternation amongst the banks is starting to show with a tightening on lending, a crackdown on interest-only borrowing and out of cycle rate rises. Australia has some way to go until the housing market evens out and interest rates are hiked up. Either way, first time buyers in Sydney and Melbourne will be pleased to hear the housing market is cooling off.

What three things should investors look out for in 2017? 

  • Bank interest remains low – investors can expect low returns from their bank deposits as rates remain low for the near future. Investors won’t grow their capital with bank deposits; so it’s important to consider growth assets in this low yielding environment and diversify.
  • Global growth – current markets conditions are supportive of growth assets. As global growth, albeit sluggish, has been the story for the past 12 months – it will likely continue for the foreseeable future. Rental yields, share markets, commercial property and infrastructure will all benefit from this trend over the next 12 months.
  • Turn down the noise – short-term events can blow investors off course from their longer-term financial strategy. Geopolitical events, including elections across Europe and the US, are all important, but don’t tend to have a lasting impact on investments or portfolios over the long term. Investors should stick to their flight plan.
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