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Investors to continue tussle with low cash rates

Samantha Hodge  |  24 Jan 2013Text size  Decrease  Increase  |  

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Samantha Hodge is a journalist with InvestorDaily, a Sterling publication.

 

Australian investors are likely to keep grappling with low cash rates over the next 12 months if they continue to avoid equity investment, according to Zurich Financial Services Australia (Zurich).

Evidence would suggest that investors will, at some point, need to look at the return equity markets hold over a longer cycle. Current interest rates are back to global financial crisis (GFC) lows, but this is due to differing factors to before.

Zurich senior investment strategist Patrick Noble said that as opposed to financial markets around the world being stabilised using emergency measures, this time Australia's economy is slowing, causing a rate that has been cut down to 3 per cent.

"They're expected to go a bit lower, so you're just not getting that return from cash relative to the safety that we've become conformable with," Noble told InvestorDaily.

"[Cash] has been an easy place to be. I'm not saying the response hasn't been warranted, but sooner or later, when you're seeing big dividend yield, you don't really need that much earnings growth.

"When I talk about tussle, it's that type of return and [about having to] climb the wall of worry, because everyone is still looking, to a degree, to why they shouldn't invest in equity markets," he said.

He explained that although the past 12 months have been positive, investors have typically been finding excuses not to invest in equities, rather than looking at how to build and diversify their portfolio.

Earlier this month, Noble highlighted the increasing attraction of equity investments, citing high yield and low volatility.

He explained that advisers, instead of continuing to predict and track the Australian dollar, should acknowledge there is an opportunity to provide global assets to Australian investors.

"If you still stick to things like leveraging out of cash into other risk assets - probably more along the equity line - you're not throwing it all in one heap, but you're gradually getting back into the market," he said at the time.

In addition, expectation of further rate cuts by the Reserve Bank of Australia (RBA) is another reason advisers should look to equity investment.

Even if commodity prices stabilise, and there has been some evidence of this over the last few weeks, it looks like the economy will have to adjust to the peak-mining-related type of activities, he said.