You do not need me to tell you that financial markets are experiencing ‘interesting times’. From what appeared as a full-on recovery in the economy and positive outcomes for investors late last year and early into the calendar year, we are hearing talk of bear markets and even a possible recession. And of course, those blessed with hindsight saw it coming!
While not claiming to have seen it coming, our article in January this year What will 2022 bring for your SMSF? did point to a number of possible outcomes, in particular market volatility. A key driver of volatility in markets is uncertainty and we picked up on this theme in the following month with Share Market Volatility. The big uncertainty now is inflation and how central banks globally and here in Australia, the RBA, will manage interest rate policy.
Some investors and SMSF trustees may now be seeing future rate rises as great outcomes, with a return to higher rates on bank deposits providing more income. Others who have taken on higher risk, increasing holdings to equities through the ‘interest rate drought’, may now be thinking of reducing equity holdings in favour of cash and term deposits.
For those new to investing, directly or as a SMSF trustee, there may be some confusion on how volatility in equities can drive the market down, removing gains on paper, especially if exposed to tech and they may now be considering what to do next.
And there is plenty of commentary painting a bleaker future and what to do next by way of ‘here are my ideas on how to beat inflation’ and ‘recession proof a portfolio’.
So, let’s take a look at what may be happening on the interest rate front and whether investors should consider switching to cash from equities on the way ahead.
Last month’s article included a link to the ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve. It provides a guide to the direction and level of where the professional market considers rates are headed. In May, it suggested cash rates around 3.5% in a year’s time. Following the June 0.50% increase in the official cash rate, it is now suggesting rates of around 4.40% next year; pricing in further increases that peak around June/July 2023. Again, please note its disclaimer.
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Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.
Ian Irvine - Guest Contributor
Ian has been a keen investor for over 40 years and can draw on his experiences from both investing on his own behalf and also having worked in financial services for more than 30 years. Over this time, he has seen many changes that impact investors’ attitudes to in what and how they invest.
He started his career in what is now referred to as fast moving consumer goods (FMCG) or grocery, working for an Australian margarine manufacturer. In 1986, he was recruited to Westpac around the time of deregulation of the sector, where he spent 10 years before taking a role at AMP and then with ASX for 14 years up to the end of 2017. He continues to be involved with ASX; working on their educational programs.
In 1996, he and his wife established their own SMSF and again the experience and lessons learned regarding managing an SMSF over the years have provided him with many insights and ideas. He enjoys sharing these with others where these are helpful and always suggest that if an investor or SMSF trustee is unsure, that they should seek appropriate advice from a licenced professional.
Ian holds a B. Com (UNSW), and lives in Sydney and enjoys travelling to and meeting investors and SMSF trustee at the educational events with which he has involvement with from time to time.