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Interest Rates Lower for Longer?

Interest rates are set to stay low for a long time yet

Investors and retirees be warned – Interest Rates could remain at low levels for the next decade and possibly longer. At least that’s the base case expressed by Australian based International Fund Manager, Platinum Asset Management at their late-April 2016 Adviser Briefing held in Brisbane. If this contention is realised, lower interest rates will result in lower returns for investors; and less cashflow to fund retirement lifestyle.

A reflection on events that previously affected this metric

The Platinum case is predicated upon some compelling arguments which are summarised as follows:

Over the past 30 years the world has seen a series of rolling investments booms and busts: think about the 1989 Japanese property market collapse, the 1995 Asian bull market ending in the Asian Debt Crisis, the Russian Bond Crisis and LTCM collapse, the 2000/01 Tech Boom/ Tech Wreck, the 2006/07 US housing sub-prime / Global Financial Crisis, the 2012 China Resources Boom – and possibly in 2016: Biotech, and Australian residential apartments (the latter two yet to bust!).

However we are now in a very different world, experiencing unprecedented levels of government debt, as well as unprecedented low and even negative (in Europe and Japan) interest rates. Whilst not wishing to draw too close a parallel to history, acknowledging we now live in very different times, Platinum also noted that following previous major world financial crises in the 1890’s and 1930’s that interest rates also remained low for the following 25 years!

The factors detailed below, all act as constraints on economic growth. In this context it may well be that Platinum have a valid point.

The current drivers of yield on cash invested

The following are just some of the features of this new environment that we are now facing:

  • High Debt/High Interest Rate sensitivity. Basically markets are very sensitive to any attempts by central banks to raise interest rates due to the high levels of debt. Central bankers are hesitant to raise rates as market volatility appears to be heightened by the debt overhang.
  • High Excess Capacity – whether it be steel plants, computers or high rise apartments, industries across the board appear to be suffering from excess inventories/production putting downward pressure on prices.
  • Consumers saving more – despite record low and even negative interest rates, designed to promote spending/investment, consumers are continuing to focus on paying down debt – particularly in view of low returns on secure cash investments.
  • Falling Inflation – despite a long period of ever declining interest rates, inflation has remained either constant or falling, rather than rising – this is reminiscent of the Japanese market post-1990 following the collapse of their property boom.
  • Wage suppression – due to the enlarged labour pool created by globalisation ie, the bringing on of millions of new workers eg from China and India etc.
  • Technology, Innovation and Disruption continuing to drive prices lower.
  • Governments reducing spending as they try to repair their balance sheets.

Platinum suggests a solution to dealing with the anticipated long-term low interest rates environment

So, where to invest if interest rates do remain low? Obviously, as an International shares manager, Platinum Asset Management would espouse some exposure in that area. As Platinum CEO Kerr Neilson put it, “It’s not governments that create wealth, it’s companies”, as he inclined thinking towards higher-return assets.

The tricky part, in terms of retirement income, is how is this new environment going to impact on equity markets? – after all, zero interest rates do create their own valuation challenge when the appropriate return on shares is often compared to the risk free rate, i.e. how does one price shares when the risk free rate is zero (not to mention that lower dividends are likely to be the next impact on investment returns).

This is basically uncharted territory, however Platinum believe that they can draw some insights from their long history of operating in the moribund Japanese market. They cite as strategies that worked for them in this market the following:

  • Buying growth at reasonable multiples – a price-earnings (PE) multiple of around 20 seemed to produce the better results.
  • Focusing on stocks with sustainable high dividend yields.
  • Taking a contrarian/value based approach and buying stocks with low ‘price to book’ ratios.

These strategies have worked extremely well for Platinum evidenced by their long term out-performance of the MSCI World index.

Noting that the current long term price – earnings (PE) multiple of the US sharemarket (currently running at 26) would suggest a 2% total return from that market over the next 10 years, Platinum were also keen to highlight the necessity of both taking a stock picking approach and being in the right markets as, in their view, essential elements for success.

In terms of their views of things at home in Australia, in response to questions from the floor, Platinum offered that they would expect the Australian dollar to fall over time from its recent 76 cents level against the US dollar; that resources will slow further; and that the Australian high rise apartments bubble to burst.

Interest rates lower for longer? Only time will tell, but based on Platinum’s observations it’s definitely a possibility.

Are you looking for a strategic solution to the ‘low interest rates for longer’ dilemma?

The advisers at Continuum Financial Planners Pty Ltd have access to a diverse range of well-researched investment assets that they can recommend to you – and to blend them in a portfolio that will be constructed on the basis of your personal risk profile, your personal financial position – and goals; and the timeframe by which your goals need to be achieved.

To arrange a meeting with a member of our advising team), please phone our Upper Mt Gravatt office on 3421 3456; or use the website online Contact Us form: you will receive a prompt, courteous response and benefit from our professional services approach – ‘we listen, we understand; and we have solutions…‘.

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