Low interest, low inflation and low unemployment are the defining features of today’s economy – but will this continue in 2020? And how will this impact investments?
These were some of the questions discussed at recent investor lunches hosted by Qualitas and Crestone in Sydney and Melbourne. The panelists at the lunch were:
- Andrew Schwartz, Group Managing Director, Qualitas
- Scott Haslem, Chief Investment Officer, Crestone Wealth Management
- Nerida Conisbee, Chief Economist, REA Group
Key observations shared with the attendees included:
- Low interest rates have had some success in stimulating the economy, but their impact is limited. As the Reserve Bank of Australia has been indicating for some time now, fiscal policy needs to be working alongside monetary policy. Government policy has a crucial role to play in this respect.
- There was limited appetite for more interest rate cuts among the panel members and guests. Beyond an additional (widely-expected) cut, guests agreed that there are dangers in the type of ultra-low or negative rates that have been playing out in Europe with unintended consequences. The socio-political fault lines apparent in Europe right now, coupled with subdued economic conditions, suggest that central bank policies in the region are failing to achieve their aims.
- In the context of low rates, investors need to reset their expectations for returns, or otherwise move up the risk curve. The next few years will see a ‘new normal’ emerge for investment returns, and it will be lower than in the past.
- Low interest rates continue to encourage debt in both government and business strategies. One panellist suggested that a re-elected President Trump would increase debt, with the result of pushing the Australian dollar higher. For investors with unhedged global equities, now may be the time to apply some hedging to a portion of their portfolio, in order to provide a buffer from this risk.
- The residential property market is at the beginning of a recovery, however, at this point in the cycle, development funding is changing. A reluctance among buyers to purchase off-the-plan apartments is creating challenges for some developers. One emerging response is Build-to-Rent, where the developer remains the owner. This is a popular asset class in the US and UK, and is set to become a feature of the Australian market in coming years.
- Industrial and commercial properties are continuing their long run of strong performance. However, there is a possibility that this trajectory will flatten out, as it will be difficult to increase rents significantly without a commensurate increase in the economy.
- Sustainability is an increasingly important factor for investors in property, even in residential. While commercial and office buildings have been subject to scrutiny in terms of their ‘green’ footprint for some time now, this is starting to be the case for residential developments too. We can expect to see more focus on the environmental impact of residential construction among both investors and residents, especially with energy prices continuing to rise.
The overarching theme of the discussion was that economic conditions aren’t expected to change significantly as we enter a new year and a new decade. While there is some geo-political uncertainty, the lower-for-longer environment that has shaped today’s economy is set to continue for the foreseeable future.