Five answers to help investors ride out market uncertainty
- Is the Australian property market a bubble and does this have implications for central bank policy and interest rates?
We don’t see the situation as a bubble and believe that strong population growth – especially in Sydney – will continue to underpin demand. However, we have moved into oversupply of residential property in some cities including Brisbane and Melbourne. Rising interest rates and lower foreign demand are also tempering growth.
For its part, the Reserve Bank of Australia (RBA) is mainly concerned about the potential for elevated levels of mortgage lending and borrowing to destabilise the financial system. In turn, regulators have introduced prudential measures since 2015 to control higher-risk lending in the housing market. These are having an impact and should help avert a crisis.
In terms of the property market’s effect on interest rates, we believe the key question to consider is how high rates might go. Given that the debt levels of Australian households have increased from 60% of income to around 200% – largely due to high level of mortgage indebtedness – we expect that the RBA will be reluctant to let rates rise too high. In turn, it expects the cash rate to stay below 4% for the foreseeable future.
Europe seems to offer a better value than the overvalued U.S. market. How is Russell Investments investing in Europe?
Our view is generally positive about European equities since they are less expensive than U.S. stocks.
Further, because most large-cap European stocks are multinationals, they earn about 55% of their income from outside the Continent. This ameliorates issues occurring within Europe, such as the rise of far right and smaller political parties in some countries.
For our Russell Investments Global Opportunities Fund, hawse have pursued a selective and tailored strategy by identifying stocks with high domestic revenues and positive momentum. As the world moves into later stages of the current growth cycle and there is the prospect of interest rate rises, we are also focused on energy-related investments as a defensive measure.
With interest rates and inflation going up, how are we managing our fixed-income portfolios?
Rising interest rates are generally negative for fixed-income portfolios so we advise investors to err towards shorter-duration debt and to diversify their holdings. It also sees risk in credit – particularly the risk that central banks will get too far behind inflation expectations and will need to play catch-up. Investors should therefore assess their levels of credit risk and also consider shifting these exposures to the shorter end of the curve.
How will the Trump administration’s recent announcements on trade tariffs impact the U.S. and global economies?
An increase in tariffs on steel or other commodities by the U.S. would be negatives for global trade and investment. However, we believe it’s sensible to wait to see which measures are enacted. It’s possible that the threat of tariffs will be used more as a bargaining chip in international negotiations than introduced into law any time soon.
Where should investors put their money this year? Should they de-risk their portfolios in the face of volatility?
Volatility has moved higher in in 2018 and is likely to remain so amid rising pressures on inflation and interest rates.
However, there are tactical opportunities to consider in European equities (as discussed above), emerging markets, local currency debt and commodities. The yen is also attractive among currencies. In each case, investors should seek expert advice where appropriate.
* This article is based on a plenary session at the Russell Investments Summit 2018 in Sydney, where the following Russell Investments experts gave their views:
- Tim Cook, Director, Consultant
- Alexander Cousley, Investment Strategy Analyst, Australasia
- Graham Harman, Senior Investment Strategist
- Clive Smith, Senior Portfolio Manager, Australasia
- Andrew Sneddon, Managing Director, Multi-Asset Solutions
- Bronwyn Yates, Director, Product and Business Strategy (Moderator)