We’ve lived through some benign investment times with property and shares ramping up as interest rates fell for a decade, but things are changing dramatically.
Even COVID-19 proved just a scary blip for shareholders and super fund members. But now the times are harder and people will be wondering what to do.
Unemployment is at record lows, but there are still “lots of reasons to be concerned about the macroeconomic outlook globally and domestically,” said Dr Jim Stanford, economist with the Centre for Future Work.
The stunning recovery from the pandemic recession was the result of “some pretty unique factors” that Dr Stanford says are now dissipating.
The world of low interest rates is over with recent rises just the beginning.
“Tightening is going to be fast because central banks are determined to wrestle inflation back down no matter what,” Dr Stanford said.
Already, a sharemarket shakeout is upon us with a choppy down trend emerging since January.
Housing prices have risen 25 per cent in the past 18 months, AMP Capital chief economist Dr Shane Oliver says.
As a result he is expecting home price falls to continue as interest rates rise.
Anyone fronting up the bank for a home loan today “will find themselves coming away with a much smaller loan commitment than they would have several months ago when rates were a lot lower,” Dr Oliver said.
Debt trap
The banks not only have higher rates in their minds, they realise that the ratio of household debt to household income is rising alarmingly.
“Last time there was a brief monetary tightening it was running at about 150 per cent and today it’s 185 per cent,” Dr Oliver said.
ANZ and Westpac expect the cash rate to be higher come June.
That will translate into much higher home mortgage rates that might make Dr Oliver’s predictions look too conservative.
How to protect yourself
Steve Mickenbecker, chief commentator with Canstar, says the thing to do is not to try to lock your mortgage in at a fixed rate.
Fixed rates have already move significantly this year so ” they are now so much higher than variable rate loans, I don’t think people will be running off to fix at this time,” Mr Mickenbecker said.
The best thing to do for existing and prospective mortgage payers would be to go out and get new deals being offered for refinancing and new loans.
Those deals are for variable rates, but the banks will honour their relativities as interest rates rise.
So how should investors and super fund members deal with the falls in sharemarkets that could get even worse as interest rates rise further?
Predictions are just that
The first thing to be sure about is that panicking is not a smart option, says Thabojan Rasiah, principal of Rasiah Private.
“None of us can know the future,” Mr Rasiah said.
“There’s always good and bad things happening around the world so the important thing for people is to be clear about the things they can control and predict and the things they can’t.
To deal with your investments and super you need to be clear about “what you need long term from a growth perspective and what you need from a cash-flow perspective,” Mr Rasiah said.
That means if you are still working and paying your way, then you can leave your investments to deliver you maximum growth in the long term.
If you are retiring or planning to retire, have a cash nest egg that will ensure you don’t have to sell investments in a falling market to get cash in hand.
Think about all that now, Mr Rasiah says, and if you need to restructure your investments to get some cash then do it.
“That might be for the next year or the next 10 years,” he said.
It’s not all about cash. It might pay to get some advice on the growth part of your portfolio to make sure it is set up to deliver you optimal returns.
But think of your long-term needs and don’t just respond to what experts say about the economy.
“The investment gurus have been talking about us entering a low-growth environment for the last 10 years,” Mr Rasiah said.
“They could be right this time, but they’ve been saying it for 10 years and it hasn’t happened.”
The New Daily is owned by Industry Super Holdings
