It is generally agreed that the worst of the recent economic turbulence is over in Australia with leading indicators producing positive signs. In this environment the Reserve Bank of Australia (RBA) is now turning to more conventional monetary policy issues; amongst these being the level of interest rates.
This is not to ignore that Australia is not immune from global trends and many of our trading partners are in different stages of recovery. However, the economy does appear to have avoided the worst of the global economic turmoil and we can now focus on recovery without having to worry about a deep recession.
The two main issues that now face our policy makers are:
1. To wind back the stimulus package of the past two years in an effort to prevent unrestrained economic growth and inflation which erodes the purchasing power of accumulated savings.
2. To be cognisant of the ever present risk of a double dip in economic activity.
Recent pronouncements from both the RBA and Treasury have suggested that it is the former which is first and foremost in their minds. Hence the focus on monetary policy and the accompanying increases in interest rates recently announced, with more anticipated.
Even though increased interest rates do have their downside (for example increased mortgage rates), the fact that the interest rate cycle has started to turn may be interpreted as a signal that economic growth is returning to normality- better economic conditions and improving job prospects, which are reflected in company earnings, profitability and share prices.
With improving trends in most economic indicators it appears that the recovery is becoming self sustaining. However, the Australian experience is in contrast to the US, Europe and Japan which all had deep economic downturns, will take longer to recover and hence longer to commence increasing interest rates.
In moving early and pre-empting any significant inflationary trend, the RBA is aiming to keep the inflationary genie in the bottle and should prevent more substantial moves in future years. In Australia it has been suggested that the “normal” level for cash is around 5%. Under current circumstances that level is unlikely to be met until late in 2010, with higher levels possible through 2011 to 2012 as the rest of the world recovers and begins to generate stronger economic growth.
The recent tightening cycle of interest rates in Australia may cause some jitters in the investment markets, but the moves should be viewed as an inevitable consequence of an economy recovering from a severe economic shock, and emerging to deliver more prosperous financial returns over the next few years.
Members should note that interest rates ticking up may, in the near term, herald a pause in the current rally that has translated through to an extremely strong recovery in the returns of all options exposed to shares within CareSuper. The CareSuper Balanced Superannuation option has returned 11.50% for the financial year to 13/1/2010.
Financial markets cannot be expected to rise as quickly as they have in the past six months without taking a breath. It is likely that share prices will be more dependent on earnings growth which could lead to more constrained returns in the near term. However, with economic indicators still rising, earnings improving, interest rates still low and investors relatively cashed up, there are positive signs for a long term share market rally, albeit that there may be some bumps along the way. So, while we can be somewhat relieved with the recovery currently being experienced, we should remember that investing is a cyclical business and the cycle continues.
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