Friday, 19 June 2015

Where are the returns in a low interest rate world?

Where are the returns in a low interest rate world?

Global central banks are cutting interest rates and devaluing their currencies at the fastest pace we have seen since 2009. Global equity markets have benefitted from this increase of liquidity, highlighted by the performance of European stock markets since the announcement of the European Central Bank’s Quantitative Easing programme in January, which officially kicked off at the beginning of March this year.

Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. They support and encourage economic growth by increasing the supply of money but this leaves individuals holding cash in sizeable amounts left behind as inflation slowly eats away at the value of the money in the account. This has left many investors and retirees especially looking for new ideas to generate returns. In the current environment predictable income in the form investing in large cap, defensive, blue chip, dividend paying stocks should be the focus of every investor as interest rates fall and currency values plummet.

As the Euro slides closer to parity to the US Dollar and global currencies like the Australian Dollar and Canadian Dollar fall in value, the ramifications on global corporate balance sheets will soon take centre stage. On top of already increasing volatility across financial markets, I believe the only way to shield ones investment portfolio is through investing in defensive strategies that enhance returns through predictable income.

Some of the Equity High Yield Income Funds or dividend paying stocks are a sound investment opportunity that fits the current investment climate. On top of receiving capital growth from large cap, developed market stocks, the funds benefit from dividend income from the underlying equities with the aim of smoothing returns as markets move.

Finding quality income in the form of stocks that pay stable and high dividends should be a priority for investors. Finding stocks or funds producing 4%-6% target per annum for dividend income is not that difficult. Try looking at some well-known stocks like: GlaxoSmithKline, Sydney Airport, Verizon, Zurich Insurance, Duke Energy, American Electric and AT&T. My preference is usually developed market countries focusing on Westerns Europe, The United States, The United Kingdom and Australia, although good opportunities do exist in the Emerging Markets.

While no one is able to “judge the directions of markets” accurately over a short time and assuming equities will broadly be the same price or higher in the long run; then income from dividends will provide the added return for investors. In today’s world investors need funds that are fully transparent, do no use leverage, are easy to understand, offer real liquidity and provide consistent returns.

If 2015 has taught us anything so far it is that global interest rates are only headed in one direction as global central banks try to fight of deflation and spur growth. This will undoubtedly push investors into global equity markets as we have seen in the United States since 2009.

A buy strategy focusing on blue chip, developed market, dividend paying stocks should be the main focal point within any investment portfolio in order to provide stable and predictable income over the uncertainty of market returns in increasingly volatile times.

When blending the equity income funds with a solid base of lower risk assets such as bonds and alternatives like property, overall portfolio returns should be consistent to provide a valid alternative to cash in the bank. We favour a 40/60 split between equities/bonds for clients who have a balanced approach to risk. Where clients look for more or less risk simply increase / decrease these ratios accordingly. When in doubt always seek professional advice.

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