It’s been an interesting week, starting with the running of the first Melbourne Cup to have no crowds in attendance!
Next, there was the Reserve Bank of Australia board meeting, with the RBA cutting rates by a further 0.15%. This took rates down from 15 basis points to another all-time low of 10 basis points, or 0.1%.
Finally, there was the big one – the US election, at time of recording still in progress, and I believe it will continue to play out for another week or so. Despite the fact that Democratic nominee Joe Biden is just shy of the 270 electoral votes required, challenges coming from the Republican party may continue to extend the process. However, I do expect that Biden will secure one of the four states required for him to accrue the necessary 270 electoral college votes and become President of the USA.
In this article, I will focus my attentions domestically – specifically with the cuts made by the RBA. The following charts will highlight where Australia sits, given the changes implemented by the RBA over the last sort of 12 months, and how we are faring compared to the rest of the world.
Firstly, the below chart demonstrates how the RBA has been constantly cutting rates since the middle part of 2019. Cash rates have fallen close to 1.5% since May 2019, and today – as I mentioned earlier – sit close to 0%.
If we compare the current rate in Australia to that of our counterparts around the world, it becomes clear that all central banks have been very aggressive in cutting official cash rates right across the board.
In Australia, it’s worth noting that in November 2008 – through the beginning of the GFC – the cash rate was about 5%. Over the last 10 years, we have seen cash rates move lower domestically, a move echoed right across the globe. For example, in Europe, cash rates are sitting at 0% and in Japan, there is now a negative official cash rate.
With this considered, what has occurred in terms of monetary policy over the last 10 years has been quite incredible.
As part of that monetary policy, along with other quantitative easing programs, the RBA announced a major bond buying program for the five and 10 year part of the sovereign new curve, while continuing to focus on price stability at the short end. But despite such significant easing globally, inflation continues to be mired well below central bank targets. On the back of COVID and its associated challenges, the economic outlook globally remains challenging.
From an investment perspective, discussion is warranted when it comes to where opportunities may lie in the context of that cash rate.
Despite the current return profiles for fixed income, we do believe that there is an appropriate need to include fixed income investments in a portfolio. However, on the back of this move by the RBA – and certainly the way that we see continuing fiscal programs through the course of 2021 – we also believe that equities and growth assets continue to be an important part of portfolio matrix going forward.
Domestically, policy framework promises to be very interesting heading into the early part of next year, given what we are seeing from the fiscal side. But we do believe that it is going to continue to be an important element in assisting what has already been prevalent in terms of central bank policy.
From that perspective, we don’t expect to see any changes in the cash rate over the next couple of years. We feel this continues to afford investors the opportunity to think more long-term in terms of overall portfolio construction, allowing them a greater focus on assets and investments that can offer that growth while the global and domestic economies recover.
As always, if you have any concerns about your portfolio, please feel free to reach out.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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