Some investors continue to make decisions based on recent performance trends despite signs of an impending economic downturn, former Reserve Bank of Australia board member Warwick McKibbin says.
McKibbin states that rising uncertainty in the global economy will probably have an impact on the Australian economy sooner, rather than later, as inevitable global rate rises will force down the value of assets. This may take some investors by surprise.
“There are a lot of people who invest on trend,” McKibbin says. “For example, the stock market went up last year and again this year, but there will be a turning point and history shows us that. The likelihood of a turning point is rising every year.
“We really don’t know which way the world is going to go and therefore diversification is a pretty good strategy right now.”
McKibbin recently told the Australian Financial Review that keeping the nation’s benchmark interest rate below the global rate for any length of time could put downward pressure on the local currency, driving up imported price inflation and discouraging investment. He reiterated this for Investment Magazine.
“There are a range of short-term adjustments, including those caused by trade wars and central banks lining their policies up with the end of quantitative easing, which will move us back to a world of rising interest rates,” he explains. “We need to think about the impact of these short-term cyclical adjustments.”
McKibbin explains that such adjustments will bring down the value of assets in some economic arenas, including across the sharemarket and in real estate. Income investments might also be affected, depending on how portfolios are constructed, he says.
“Most super professionals in the industry are diversifying portfolios in anticipation of a market change, although there’s also a tendency for funds to follow one another,” McKibbin says. “There’s an idea that you don’t want to move too far away from the pack. But that sort of herd approach, of not moving too much from the average, is dangerous. “It’s especially problematic if there’s a turnaround in either direction. If there’s a big downturn, then everyone goes down together.”
This week, the RBA kept the official cash rate at 1.5 per cent for the 23rd straight month.
Warwick McKibbin will join Peter Higgs in a fireside chat at the Investment Magazine Fixed Income and Credit Forum, at RACV Healesville, Victoria, July 24-25. For more information, visit the website.