We keep being bombarded by missives of uncertainty, volatility, slowing economic growth around the world and faltering levels of consumer confidence. Recent Australian statistics have revealed that inflation is running well below our central bank target band and this prompted the lowering of its key interest rate to an almost unprecedented 1.75%.
Yet, there are signs of our economy making good progress in re-balancing after the end of the commodity boom, the job market is getting slightly better rather than deteriorating and in the last few weeks the Australian share market has been exhibiting an improving trend possibly reflecting higher business confidence.
Perhaps the biggest risk factor for world economic progress is posed by very high sovereign and other debt levels in many important countries. Japan is almost a basket case in this regard, China is probably not a lot better (although it is more difficult to assess this and likely repercussions) and USA, Italy and France also carry very high debt burdens. By comparison and whatever one thinks of Australian politics and politicians it should be acknowledged that as a nation we have done a lot better than most developed countries in controlling our level of sovereign debt.
So, what to make of it all and when will investment markets calm down and return to some form of normality? As always the answer is simply – we do not know.
Holding cash in Australian bank accounts obviously is the safest option, but the earnings rate is abysmal and without a very large holding it is not possible for, e.g. retirees to live off such earnings without eating substantially into capital. Residential property has been a marvellous investment in recent years, certainly from a capital gains perspective, but going forward there are a number of warning bells primarily based on the relative un-affordability of such property compared to the level of wages and salaries. Commercial property investments, accessible through both listed and unlisted trusts, currently present a reasonable balance between risk and (income) return.
It is difficult to go past Australian shares as an asset class that currently produces a good level of income, particularly in combination with franking credits. However, it represents a step up in risk level and based on traditional valuation models the market is moderately expensive. With the flight of conservative investors into the share market as a consequence of seeking higher income and with exceptionally low interest rates, perhaps higher valuations might well be justified. International shares are also generally a bit expensive and caution is as always advised.
Diversification is more than ever the answer to where we should have our investments parked. The distribution of investments between asset classes is a very individual consideration tied to the investor’s risk profile and needs.