Market Watch

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.25 per cent, effective 4 February 2015.

Growth in the global economy continued at a moderate pace in 2014. China's growth was in line with policymakers' objectives. The US economy continued to strengthen, but the euro area and Japanese economies were both weaker than expected. Forecasts for global growth in 2015 envisage continued moderate growth.

Commodity prices have continued to decline, in some cases sharply. The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns reaching new all-time lows over recent months. Some risk spreads have widened a little but overall financing costs for creditworthy borrowers remain remarkably low.

In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year. The fall in energy prices can be expected to offer significant support to consumer spending, but at the same time the decline in the terms of trade is reducing income growth. Overall, the Bank's assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected. The economy is likely to be operating with a degree of spare capacity for some time yet.

The CPI recorded the lowest increase for several years in 2014. This was affected by the sharp decline in oil prices at the end of the year and the removal of the price on carbon. Measures of underlying inflation also declined a little, to around 2¼ per cent over the year. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit growth picked up to moderate rates in 2014, with stronger growth in lending to investors in housing assets. Dwelling prices have continued to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain economic risks that may arise from the housing market.

The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. At today's meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.

Globally

• Growth is likely to remain around 3.5%; ranging from 1-1.5% in the Eurozone and Japan, 3.5% in the US and 7% in China.

• Inflationary pressure is likely to remain fairly low and the overall monetary backdrop, despite a probable tightening by the US in the middle of the year, will remain fairly easy. We will likely see further easing in Europe, Japan and China.

For Australia

• We should see growth move up to around 3%

• Inflation is likely to remain benign

• The Reserve Bank of Australia is projected to cut the cash rate to 2.25% early in the year with a 50% chance of another cut in the June quarter.

Rebalancing the economy

As Australia transitions back to a more balanced economy, investors should try to avoid getting too gloomy. Yes, the mining sector is slowing down, but low interest rates and a falling Australian dollar is providing a great boost for non-mining parts of the Australian economy. For instance, we’re seeing a return to life for retail-related areas of the economy. Housing and construction has picked up, construction activity related to infrastructure continues, and the tourism, manufacturing and higher education sectors are showing signs of improvement.

Unemployment will eventually fall

While economic growth is still not strong enough to lead to a fall in unemployment, we expect that the job market in 2015/16 will start to pick up as the stimulus to the economy from lower interest rates and the falling Australian dollar starts to feed through.

What does this mean for investors?

It should mean another year of reasonable returns for diversified investors. But there are two key things that investors need to be mindful of:

• What we saw in 2013 and in 2012 (returns of around 20%) out of shares is not sustainable over the long-term. Expect something more like 8-10%;

• Every year experiences a lot of ‘noise’ and 2015 will be no different. This can be negative in terms of distracting you from your key investment strategy. Try and turn down the volume on the financial news and focus on maintaining a long-term investment strategy.

 About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) 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 information 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, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

This is especially true for retirees who are largely reliant upon their financial assets to fund their lifestyle. As a result, advisers are fine-tuning their advice frameworks, and seeking investment strategies better matched to client goals and expectations. With the new year upon us, we explore the importance of goal-setting and retirement planning.

Boost your income retirement

As the baby boomers begin to wind back their work commitments, an increasing number of Australians will need to draw on financial assets as a source of income to supplement any government support. In the context of constrained economic expansion and people now living longer, retirement planning becomes critical.

A few things to consider:

• Once you stop working, how will you meet your cash-flow needs to cover everyday expenses such as food and energy?

• What kind of lifestyle do you want to lead? How do you visualise your activities in the early stage of retirement – going to the cinema every month or perhaps an overseas holiday every year?

• Do you anticipate setting some money aside to support long-term aspirations such as providing financial assistance to grandchildren or making a large contribution to some other cause close to your heart?

There are a lot of moving parts when it comes to planning for retirement. You need to identify and prioritise your goals, estimate how much income you may need and assess your likely financial capacity in retirement. Then you are better positioned to work out what saving and investment decisions to take today that could help you boost your income in retirement. A financial adviser can help you through this process, considering your objectives, your personal circumstances and prevailing market conditions to design a strategy that is most suitable to you.

Keep your investments on track

Planning for retirement is an ongoing process that requires periodic review. Throughout your working years, your planning may progress through a series of stages in which you will clarify your investment objectives, evaluate your progress and make decisions to build confidence that you are on track to reach your investment targets. Even after retirement, with market conditions and your personal circumstances subject to change, you should periodically review your investment strategy to ensure you remain on track to realising your dreams.

Final thoughts

Entering the new year, we encourage investors to reassess what they want to achieve from their investments, and to take action by speaking to their financial adviser to bring about these changes. While thinking of investing for retirement can seem overwhelming, it should encourage you to map out a clear path to success.

About the Author

Jeff Rogers, Chief Investment Officer, ipac Investment Management at AMP Capital, joined AMP Capital in 2011 from ipac securities following its acquisition by AMP Ltd. He has over 27 years of investment management experience. Jeff holds a Bachelor of Science (Honours) from the University of Melbourne.

A combination of the blanket news coverage of economic worries, the associated information avalanche we are now exposed to and our innate fascination with crises is likely making us worse investors. We’re more fearful, more jittery and more focused on the short-term. With the year drawing to a close, now is a good time to reflect on some key lessons from 2014.

Lesson 1: Turn down the noise

This year has seen an endless list of worries. Ukraine, a property collapse in China, the end of quantitative easing and talk of rate hikes in the US, global deflation, renewed weakness in Europe, geopolitical instability in the Middle East, protests in Hong Kong, Ebola, Australian budget cutbacks, the collapse of the iron ore price, and so on.

Last year was the same with the US fiscal cliff, worries about Italy and Spain and US Federal Reserve tapering. Similarly, 2012 was just as packed with worries… you get the picture. While not to deny the current worry list, it’s really nothing new. The global economy has had plenty of difficult phases in the past. And it got over them.

The reality is that much of this financial news is noise – random moves in economic data due to statistical anomalies rather than a fundamental swing in the economy, shifts in share prices and currencies that reflect swings in sentiment on the day, constant chatter about what it all means. And of course it’s well known that ‘bad news sells’.

Given all this, there are four things investors should remind themselves of:

• Shares and other growth assets have historically climbed a wall of worry and they will most likely continue to do so.

• Turn the volume down on the ‘news’ front, i.e. consume less of it.

• Adopt a long-term strategy and stick to it.

• The best opportunities in investing often arise when many are engulfed by doom and gloom and the market is cheap.

Lesson 2: Don’t ignore dividends

Up until the 1950s most share investors were long-term investors who bought stocks for their dividend income. This changed in the 1960s as bond yields rose on the back of inflation and investors started to shift focus to capital growth. However, thanks to the volatility seen over the last decade or so, and an increased focus on investment income as baby boomers retire, interest in dividends has been on the rise.

Below are some things to note about dividends:

• Dividends matter in terms of returns from shares. It has been found that higher dividend pay-outs lead to higher earnings growth, and higher earnings growth contributes to higher returns from shares over the long-term.

• Concerns about the sustainability of dividends fly in the face of all the evidence that companies like to manage dividend expectations smoothly – they rarely raise the level of dividends if they think it will be unsustainable.

• Decent dividend yields provide security during uncertain times. Dividends provide a stable contribution to the total return from shares over time, compared to the year-to-year volatility in capital gains.

• Investor demand for stocks paying decent dividends will be supported over the years ahead as more baby boomers retire and focus on income generation.

• With the scope for capital growth from shares, diminished thanks to relatively high price-to-earnings ratios, dividends will comprise a much higher proportion of total equity returns than in recent decades. Around half of the total return from Australian shares over the next five to 10 years is likely to come from dividends, once allowance is made for franking credits.

• Finally, dividends provide good income. Grossed up for franking credits, the annual income flow from dividends on Australian shares is currently around 5.7% – compare that to a term deposit rate of around 3.5%.

Dividends provide a great contribution to returns, a degree of protection during bear markets and a great income flow. Investors should always allow for them in their investment decisions.

Lesson 3: Be wary of herd mentality

The Japanese bubble of the late 1980s, US tech stocks in the late 1990s, US housing and dodgy credit in the mid-2000s all had one thing in common – investors had jumped on a bandwagon in a euphoric mass. This resulted in some assets becoming over-loved and overvalued and ripe for a crash that, of course, happened.

The trouble with herd mentality from an investment perspective is sourced in investor psychology. It is well known that individuals suffer from lapses of logic. For example, they tend to:

• Down-play uncertainty and project the current state of the world into the future;

• Give more weight to recent spectacular or personal experiences in assessing the probability of events;

• Focus on occurrences that draw attention to themselves;

• Regard events as obvious in hindsight;

• Be overly conservative in adjusting their expectations to new information and do so slowly over time;

• Ignore information conflicting with past decisions.

And of course these lapses are reinforced and magnified when many investors start thinking the same way. The mini pullbacks in share prices seen early in 2014, and then more recently provide classic examples of what can happen when the crowd gets a bit too optimistic. This then sets shares up for a pullback, relieving the optimism. However, we haven’t yet seen the sort of euphoria that is usually seen at major market tops. The key implication for investors is that, while it may feel uncomfortable, successful investing often requires going against the crowd – particularly when the crowd is at extremes of bullishness and bearishness. Various investor sentiment and positioning surveys provide a guide.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) 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 information 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, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

A combination of the blanket news coverage of economic worries, the associated information avalanche we are now exposed to and our innate fascination with crises is likely making us worse investors. We’re more fearful, more jittery and more focused on the short-term. With the year drawing to a close, now is a good time to reflect on some key lessons from 2014.

Lesson 1: Turn down the noise

This year has seen an endless list of worries. Ukraine, a property collapse in China, the end of quantitative easing and talk of rate hikes in the US, global deflation, renewed weakness in Europe, geopolitical instability in the Middle East, protests in Hong Kong, Ebola, Australian budget cutbacks, the collapse of the iron ore price, and so on.

Last year was the same with the US fiscal cliff, worries about Italy and Spain and US Federal Reserve tapering. Similarly, 2012 was just as packed with worries… you get the picture. While not to deny the current worry list, it’s really nothing new. The global economy has had plenty of difficult phases in the past. And it got over them.

The reality is that much of this financial news is noise – random moves in economic data due to statistical anomalies rather than a fundamental swing in the economy, shifts in share prices and currencies that reflect swings in sentiment on the day, constant chatter about what it all means. And of course it’s well known that ‘bad news sells’.

Given all this, there are four things investors should remind themselves of:

• Shares and other growth assets have historically climbed a wall of worry and they will most likely continue to do so.

• Turn the volume down on the ‘news’ front, i.e. consume less of it.

• Adopt a long-term strategy and stick to it.

• The best opportunities in investing often arise when many are engulfed by doom and gloom and the market is cheap.

Lesson 2: Don’t ignore dividends

Up until the 1950s most share investors were long-term investors who bought stocks for their dividend income. This changed in the 1960s as bond yields rose on the back of inflation and investors started to shift focus to capital growth. However, thanks to the volatility seen over the last decade or so, and an increased focus on investment income as baby boomers retire, interest in dividends has been on the rise.

Below are some things to note about dividends:

• Dividends matter in terms of returns from shares. It has been found that higher dividend pay-outs lead to higher earnings growth, and higher earnings growth contributes to higher returns from shares over the long-term.

• Concerns about the sustainability of dividends fly in the face of all the evidence that companies like to manage dividend expectations smoothly – they rarely raise the level of dividends if they think it will be unsustainable.

• Decent dividend yields provide security during uncertain times. Dividends provide a stable contribution to the total return from shares over time, compared to the year-to-year volatility in capital gains.

• Investor demand for stocks paying decent dividends will be supported over the years ahead as more baby boomers retire and focus on income generation.

• With the scope for capital growth from shares, diminished thanks to relatively high price-to-earnings ratios, dividends will comprise a much higher proportion of total equity returns than in recent decades. Around half of the total return from Australian shares over the next five to 10 years is likely to come from dividends, once allowance is made for franking credits.

• Finally, dividends provide good income. Grossed up for franking credits, the annual income flow from dividends on Australian shares is currently around 5.7% – compare that to a term deposit rate of around 3.5%.

Dividends provide a great contribution to returns, a degree of protection during bear markets and a great income flow. Investors should always allow for them in their investment decisions.

Lesson 3: Be wary of herd mentality

The Japanese bubble of the late 1980s, US tech stocks in the late 1990s, US housing and dodgy credit in the mid-2000s all had one thing in common – investors had jumped on a bandwagon in a euphoric mass. This resulted in some assets becoming over-loved and overvalued and ripe for a crash that, of course, happened.

The trouble with herd mentality from an investment perspective is sourced in investor psychology. It is well known that individuals suffer from lapses of logic. For example, they tend to:

• Down-play uncertainty and project the current state of the world into the future;

• Give more weight to recent spectacular or personal experiences in assessing the probability of events;

• Focus on occurrences that draw attention to themselves;

• Regard events as obvious in hindsight;

• Be overly conservative in adjusting their expectations to new information and do so slowly over time;

• Ignore information conflicting with past decisions.

And of course these lapses are reinforced and magnified when many investors start thinking the same way. The mini pullbacks in share prices seen early in 2014, and then more recently provide classic examples of what can happen when the crowd gets a bit too optimistic. This then sets shares up for a pullback, relieving the optimism. However, we haven’t yet seen the sort of euphoria that is usually seen at major market tops. The key implication for investors is that, while it may feel uncomfortable, successful investing often requires going against the crowd – particularly when the crowd is at extremes of bullishness and bearishness. Various investor sentiment and positioning surveys provide a guide.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) 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 information 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, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

Secular investing looks ahead – beyond just the next few years – to investigate the themes and directions that will shape the future world. In the flurry of day-to-day market turbulence it is often easy to get side tracked by short-term noise and lose sight of what is important in the long game. In this article, we explore three key themes which may provide exciting investment opportunities in the future.

1. Education

With the future likely to be more dependent on an increase and improvement in technology and new concepts, education is likely to be a key growth area. This will apply not only to school student and university graduates but also to the working population who will be required to keep their skills up-to-date or acquire new skills on an ongoing basis. The increase in educational requirements will not just apply to content but also in the delivery mechanism. To some extent, the internet has negated the need for a centralised education system and has allowed a more flexible structure in terms of physical location as well as timing. These delivery methods are still in their infancy and it is expected that new methods of delivery will be an important step forward.

2. The energy revolution

A growing global population, coupled with an insatiable demand for energy, will mean that new sources of energy will be a major growth area. Although companies specialising in alternative energy production currently account for only around 0.1% of global market capitalisation, this is expected to undergo a sea change in the coming years as the world shifts to a low-carbon economy. In addition, 80% of energy is lost somewhere along the value-chain so there is a vast opportunity for efficiency improvement. Increased battery technology is also likely to play a key role in supporting the new technology.

3. Ageing demographics

The world is getting older. Falling birth rates and improvements in health care have meant we are all living longer. Looking forward, this has implications for the pharmaceutical, medical and health care industries, especially where this can add to the quality of life and not just the nominal age at which we die. The increase in lifespan is also starting to have an effect on the structure of the investment industry, with a greater number of older individual investors looking for a stable stream of income. This has potential implications for company growth prospects as higher risk / higher reward strategies are replaced by ‘safer’ options. This could potentially inhibit growth and innovation if companies avoid risk in favour of perceived stability. Longevity risk will also come into play as people retire from the workforce.

We also believe that the impact of obesity, technological change and urbanisation will play an important role over the coming years.

How does secular investing differ from traditional approaches?

Today, many diversified funds are centred around benchmarks, which represent a group of securities that are constructed to represent a particular sub-set (sector, asset class or geography) of the investible universe. A fund’s performance is often judged against these benchmarks. Although there is utility in having such benchmarks – they provide a focus and allow for objective comparisons – they may not be appropriate for all investors. Secular investing offers an alternative approach. It aims to identify companies that are exposed to themes which offer solutions to the challenges of a rapidly transforming world.

Final thoughts

For those investors who are prepared to take the long-term view and who want to be suitably placed in the next 10, 20 or even 30 years, it’s important to see through the short-term mist; paying less attention to short-term ups and downs in order to capitalise on emerging investment themes and opportunities.

About the Author

Andy joined AMP Capital in February 2012 as a Portfolio Manager/Analyst within the Fundamental Equities team, and has more than 12 years’ investment experience in Europe and Asia Pacific as a senior buy and sell side equity analyst and strategist. Andy holds a Bachelor of Science in Economics (first class honours) from Kings College London, and is a CFA charterholder.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) 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 information 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, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.