Keep track of all that moves

Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, talks about key market movements and economic developments.

1. Where should Australian investors take the lead from when it comes to investment cycles?

Cycles are a fact of investing life. History tells us that markets go through good and bad phases and, inevitably, cycles turn. Investors need to be aware of past returns – if returns have been exceptionally strong and well above normal levels that might be a sign of increasing risk. But if returns have been very poor, as in the last five years, that’s often a sign that sooner or later returns will reverse. 

The best advice for time-poor investors is to take a longer-term approach. Cycles provide opportunities for those inclined to move around their asset allocations, but simply buying when sharemarkets and confidence are high and selling when they are low as many seem to do will likely mean worse returns over time.

1. What would lead the Reserve Bank of Australia (RBA) to intervene to bring the Australian dollar down?

What will most likely justify strong direct intervention by the RBA is if they judge the Australian dollar to be significantly overvalued, ie by more than 10%. An overvalued currency could cause pain in the economy, be unsustainable over the long term and may well be driven by ‘hot’ money.

But if, as at present, it’s unclear whether the currency is overvalued, it’s harder for the RBA to intervene heavily. The RBA itself has said that the Australian dollar is not far from where it should be – that it’s not fundamentally overvalued, ruling out an aggressive intervention. In fact, RBA’s approach, based on decades of experience, has been to leave free market forces to set the level for the Australian dollar.

1. What are Australian Real Estate Investment Trusts (A-REITs)? Is this a good time to invest in them?

A-REITs involve a management company who owns a number of properties (mostly Australian commercial property), setting up a property trust that’s listed on the sharemarket, with rents from building tenants passed on (after costs) to the unit holders of the trust.Over the last decade, A-REITs diverged from their traditional approach into areas such as property development, and took on more debt to maintain high payouts. Through the Global Financial Crisis (GFC), some were unable to re-finance their debts and their share prices fell dramatically.

But A-REITs have been coming back into favour, by returning to their core business and reducing debt. So, now is probably a good time to invest in them even though they have already had good returns over the last year or so. They continue to offer attractive distribution yields of around 5.5-6% – the cash flow you get from owning the trust relative to the price you pay. They are a good alternative to bank deposits, esp. for investors who want a good cash flow without the volatility that normally comes with sharemarket investments.   

1. What would you say are the three biggest economic challenges facing President Obama?

1. The first challenge is short-term – to deal with the fiscal cliff, which is a mixture of tax increases and spending cuts that are due to kick in on 1 January 2013. These measures are meant to slash America’s budget deficit. But the trouble is that they add up to around 4.5% of US GDP and if not reduced in scale could tip the US economy into recession. President Obama needs to strike a bargain with the Republicans to reduce the size of this fiscal cut back and to create a long-term plan to reduce the budget deficit.

2. The President needs to address America’s growing social inequality in a way that doesn’t hamper economic growth but reduces social tension. For instance, 60% of the income growth over the last 20 years went to the top 1% of households.

3. The third challenge is to maintain America’s competitiveness at a time when economic influence is shifting towards Asia. Obama needs to manage American expectations about the country’s global position, as America’s economic might declines relative to Asian countries, especially China.

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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).  This document, unless otherwise specified, is current at Monday, 12 November 2012 and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after that date. While every care has been taken in the preparation of this document, AMP Capital Investors Limited makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. 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. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.