Extract from Andrew Dowie's Report, BT Funds Management
5 March 2010
We believe the outlook for the Australian economy continues to look strong through 2010. The economy has continued to perform better than expected supported by strong regulatory framework, stimulatory settings of monetary and fiscal policy, stable employment and, obviously, strong trade links to Asia which has supported the economy through the very difficult period that occurred through the midpoint of 2007 right through to the end of 2008.
Official world interest rate movements – February 2010
In terms of global interest rates, in an Australian context we're likely to see interest rate rises over the next 12 to 18 months. A view more broadly is that the Reserve Bank will try and target a normalised cash rate of around about 5%. Overall, we do not expect though that interest rates will move significantly over the next 12 month period and monetary policy should continue to be relatively reflective of an easy stance compared to historical norms.
Compared with other developed economies the downturn in the Australian economy has been relatively mild with Australia only one of the few economies that did not record negative year on year growth in 2009. Given the downturn that we've seen both in the global economies, and in terms of financial markets, we do not believe that inflation will be a major impediment to growth over the next 12 to 18 months. Broadly speaking, we think that inflation is likely to remain relatively benign.
The Australian economy, in terms of growth and the performance of financial markets, we're most likely to have inflation rates tend to the mid-tier of where the RBA has targeted inflation, at sort of the 2% to 3% level. Accordingly, we don't expect that monetary policy, or interest rates, will move significantly over the next 12 month period as the global economy recovers.
When we look at the investment opportunities for investors going into 2010, one of the key factors investors need to be aware of when considering how to position their portfolios is to ensure that they have adequate diversification across a number of investments.
Whilst we continue to believe that Australian equities offer a very solid investment opportunity there are also opportunities in global markets, particularly in emerging markets, given the ongoing growth that we expect.
Generally speaking, we expect all asset classes to perform relatively solidly over the next 12 to 18 month period. On the back of solid economic growth here in Australia, we do think that the Australian economy and Australian financial markets are well positioned to add a solid investment performance to investor's portfolios.
In terms of global equities, given that our view that we do believe that the Australian currency will continue to appreciate, the global currency hedged equities portfolio should outperform those that are not currency hedged. We don't expect that there will be a significant move in international interest rates over that period so global fixed interest portfolios, whilst giving a solid running yield to investors, are unlikely to experience substantial upturns in performance as they did during 2008.
Once again, when looking at the types of strategies investors should consider for their portfolios, it's important to note what is the overall objective and what is the risk that the investor is prepared to tolerate in terms of the underlying portfolio.
Whilst the Australian market, and the Australian economy, has continued to perform very solidly, the global recovery still looks relatively mild, albeit there is no doubt that when you look at countries such as the US it is picking up over the short to medium term.
So in terms of strategies; investors really need to be aware of the risks that are still prevalent in the global market and global economy. Accordingly, we certainly recommend a diversified strategy with a focus on growth assets should continue to deliver a solid investment performance over the medium term.
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