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Financial markets focus Q2: Your questions answered

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1.     How do declining interest rates reflect on cash being a favourite asset class among many Australians?

The Reserve Bank cut interest rates late last year, and the term deposit rates came down about 0.5 per cent. With the latest rate cuts, this is likely to be repeated. As the official interest rates come down, it will have a flow on effect on mortgage rates, which is good for home loan borrowers. But the effect on term deposit rates will be reduced returns, with some of the great deals you’ve seen over the last couple of years becoming rarer.

2.     What should an investor look out for when investing in the emerging world?

The dominant countries in the emerging world are Brazil, Russia, India and China. Collectively, the positives include strong growth potential backed by reasonably sound economic fundamentals, lack of major debt problems, potential for ongoing urbanisation and high uptake of new technology. These factors can result in strong productivity growth and economic growth, which over long periods of time can lead to stronger returns from shares.

Of course, emerging markets can be quite volatile with US and European investors withdrawing investments whenever there are uncertainties in their own countries. Also, countries in the emerging world are not uniform; their development stories are different and they can’t be considered as one catch-all market. The danger is to invest based on short-term popularity and fads.

It can also be complex for investors to get the right level of exposure and to do so successfully via direct means. There’s a powerful case here for active management and managed funds.

3.     The global economy continues to be fragile. How is this affecting Australian shares?

After the strong gains earlier this year, we’re experiencing an inevitable correction. There’s concern that it may turn into something more.

European debt problems are coming to the fore again with election results showing rebellion against fiscal austerity and worries about Spanish banks. Softer economic data from China has renewed concerns about a hard landing there. US economic growth is around two per cent, but with the Presidential election in November and the end to Bush-era tax cuts next year, uncertainty may increase until there is some agreement about extending the tax cuts and some of the other stimulus measures.

All this suggests that the rough patch in sharemarkets that we have now entered may continue for a few more months. It’s important for Australian investors to remain calm through these pull backs, because policymakers will inevitably jump in and provide more economic stimulus leading to a rebound in sharemarkets – just as in the last two years. Investors may want to use any weakness to buy into shares as we go through the September quarter.

4.     How can people approaching retirement make the most of the Australian dollar?

A strong Australian dollar is great for people in a spending mode, but for those approaching retirement it may be complicated. It makes the performance of international shares more uncertain, unless they have invested in fully hedged international share funds, which removes the effect of currency volatility.

However, it’s worth noting that some of the positive drivers for the Australian dollar seem to be waning – with slowing medium-term growth in China and commodity prices already very high. So, with the Australian dollar having doubled from 48 cents 11 years ago, to a $1.10 last year, the best is likely behind us. As a result, the Australian dollar may be less of an issue for investors going forward.

Want to know more?

For more information on how current financial markets are affecting your investments and how we can help, call us today on (08) 9315 4788 or admin@explorewealth.com.au.

What you need to know

The information in this article was provided by AMP Capital Investors Limited (ABN 59 001 777 591, AFSL No 232497) and is current as at Monday, 14 May 2012. While every care has been taken in the preparation of this document, AMP Capital Investors makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. No reader should act on the basis of this article without obtaining specific professional advice.

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Greg Healey (ABN 40 903 379 148) trading as Explore Wealth Management is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706
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