Published on August 21, 2014
2 How has the investment climate in Australia changed over the last seven years? The investment climate in Australia over the last 7 years has been one of high volatility. The global financial crises of August/September 2008, with the collapse of the investment bank Lehman Brothers, saw investment markets go into a tail spin. The Australian share market crashed between November 2007 and March 2009, losing more than 50 per cent in value. Since that point the market has rallied some 70 per cent. Interest rates briefly spiked higher before falling, to be currently at the lowest level in our history. Property securities plummeted. Residential property stalled for several years before climbing strongly again in the last two years. The Australian dollar lost more than 30 per cent value against the US dollar in a matter of months, before recovering to hit record highs. Driving this extreme volatility was the global financial crisis (GFC). This was triggered by the bankruptcy of Lehman brothers – a global financial firm. Lehman Brothers declared its bankruptcy in September of 2008 resulting in a virtual freeze of credit around the globe. For a brief period, banks did not lend to each other and the money flow in all economies, including Australia, paused. There were fears that companies around the globe would collapse as they couldn’t access funding to pay their employees and suppliers. In a bid to alleviate these concerns the USA Federal Reserve rapidly reduced interest rates. This move was followed by other countries including Australia. The actions of the Federal Reserve and their counterparts around the globe was enough to avoid a total meltdown in financial markets and by mid-2009, calm had been restored. The reduction in interest rates was not enough to stop the USA from falling into a deep recession, which was quickly followed by the European Community. Australia, still enjoying a commodity price boom, managed to avoid a recession. However, over the course of the last 5 years, the commodity boom has come off the boil, resulting in the local economy slowing and prompting the Reserve Bank of Australia to cut interest rates to a record low. As the GFC unfolded, investors looked to protect their money by selling investments and depositing their money in the major banks. Bank deposits rose strongly. However, as the Reserve Bank of Australia continually cut interest rates, it forced investors to move their money into other investments such as high yielding shares and investment properties. This move from cash to other investments pushed the price of the share market and residential property higher. In 2014 the Australian investment scene is dramatically different to the lows experienced in the GFC back in 2008. With interest rates at record lows, the price of the share market and residential property are well above long term averages. Investors desperate to find sufficient income from their investments, are now faced with a difficult environment. Do they invest their funds into risky assets that are trading at historically high prices, or do they deposit their money in the bank and receive low interest on their money. The likelihood that interest rates are going to rise soon seems remote, given the slow pace of the economy. In this environment it is critical to choose investments wisely so that enough income is generated but avoid the prospect of a correction in asset prices. This portfolio will be constructed of investments that can perform in this investment environment.