Staying invested has been one of our key messages throughout the pandemic. The main driver of cash reserve accumulation in investment portfolios is uncertainty. Here are several reasons why you should consider avoiding carrying cash.
Low-interest rates are the issue with cash, and it is a global phenomenon. The inflation-adjusted return on US cash in the previous decade was a total of -12 percent. Cash is expected to lose 15% to 20% of its real value during the next decade.
Returning to Australia, the average cash rate was 2.39 percent between 2010 and 2020, but inflation was 1.9 percent, leaving a small real return margin that would almost certainly be eaten up by tax. It’s obvious that keeping cash will not increase your wealth, and it only gets worse.
The average interest rate will be much lower over the following five years, while average inflation will be 2.11 percent. Cash holdings will lose 10.55 percent over the next five years, according to our calculations.
What does the future hold in terms of the economy?
We now predict a 3.1 percent contraction in the September quarter, followed by a 1.5 percent comeback in the December quarter, bringing year-average growth to 3.5 percent this year, based on continuous lockdowns through the fourth quarter of 2021 and the gradual recovery projected in the services sector. This is significantly lower than the 5.7 percent we predicted before the NSW COVID-19 Delta variant outbreak.
However, as Australia adjusts to the epidemic, we believe the medium-term prognosis remains positive for a strong domestic-driven recovery, bolstered by low-interest rates and fiscal assistance already provided to consumers.
While we see upside inflation risks, our base case remains unchanged: underlying inflation will rise to the RBA’s 2-3 percent target by mid-2023, resulting in a rate hike in the second half of the year.
With vaccinations on target to reach 80 percent of the population by the end of the year, the reopening this implies will likely see consumers become less concerned with commodities and resume seeking out services, leading to a resumption of the jobless rate’s downward trend.
In the second half of next year, we expect vaccination levels to allow foreign crossings to reopen to unrestricted tourism.
There are a number of unknowns that could exacerbate the slowdown, the majority of which are related to China. China’s economy is slowing faster than most analysts predicted.
China’s contribution to global growth has become increasingly important. China’s activity has slowed as a result of the Delta variant outbreak, which has been compounded by regulatory restrictions, the Evergrande financial crisis, and recent power outages, resulting in a series of growth downgrades for China and other Asian nations.
China’s GDP growth prediction for next year has been lowered from 5.5 percent to 4.9 percent.
To account for the increased risk, you may consider market weightings away from the riskiest companies and toward those with better long-term prospects, higher-quality balance sheets, and a promising future dividend payout outlook.
In this atmosphere, where should you put your money?
Based on our analysis, we’ve continued to
equity portfolios in recent months toward drivers of long-term returns, rather than just recovering from the COVID-19 shock.
These are some of the areas:
A substantial overweight position in the global healthcare sector, taking advantage of the sector’s low valuation and steady revenue and earnings per share (EPS) growth.
Since records began in the late 1980s, the US healthcare sector has never had an annual sales or EPS fall.
It also tends to have relatively good environmental, social, and governance (ESG) credentials as a sector well-positioned for growth in trendy and sustainable themes.
As a result, investment in these themes has the potential to complement sustainable investing, which aims to distribute wealth to companies that benefit the environment and society while also having excellent corporate governance.
Offshoots of digitization
What’s clear is that the digital revolution has resulted in efficiencies in a variety of industries, all of which have helped to reduce their particular companies’ environmental effect.
For example, data-driven analysis has aided wind turbine manufacturers in improving the efficiency of how they generate power, lowering the cost of this energy source and making it more desirable to end users.
Software for cyber security and productivity
Any modern corporation’s must-haves create willing and able customers of technology. These are vital tools, similar to the days when miners were sold picks and shovels.
With teams needing to accept increasing geographic dispersion, asynchronous work, and flexible times in the post-COVID-19 era, we predict this broad area of productivity/collaboration to continue to develop.
For most goods, China contributes for 40-70 percent of end demand. Although mining stocks cannot totally avoid a Chinese slowdown, the extent of any retrench is likely to be smaller than in the past for three reasons:
1. Investors have already factored in a China slowdown and lower spot prices during the last 18 months.
2. The supply side is still constrained. Investment in new capacities and projects has been limited due to ESG regulations. Despite high metal prices and robust cashflow, mining capital expenditure is still approximately 30% below historical peaks this year.
3. Increased global infrastructure spending to mitigate the effects of a slowing China.
It’s also worth noting that, according to analysis, the metals industry is key to supporting the majority of the decarbonization necessary by the Paris Agreement by 2050.
This is because the metals industry facilitates the transition to renewable energy, allows for transportation electrification, and will profit from the advancement of carbon capture and storage.
As market growth slows, investors will place a greater emphasis on dividend growth and sustainability when selecting companies.
Companies that pay and grow dividends tend to be more financially stable than the ordinary company and have a history of showing lesser losses during sell-offs over time. To provide diversification benefits, we consider dividend growth strategies that are split evenly between Australian and non-Australian companies.
If you would like to discuss your investment portfolio options and where to stash your cash, give us a call at our Oran Park office on (02) 9188 1547 or email firstname.lastname@example.org
The information in this website and the links has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned on this website, consult a professional financial advisor or seek assistance to consider whether it is suitable and appropriate for you and your personal needs and circumstances.