Economic indicators provide arguments for rebalancing: AUI

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While last week’s Federal Reserve Interest Rate announcement in the US, coupled with the likelihood of a further cut by the Reserve Bank of Australia (RBA) here, add to the attraction of equity markets, it also provides good arguments to rebalance portfolios, says David Bryant, chief executive officer of Australian Unity Investments (AUI).

“Equities might look to be very strong at the moment, and indeed are likely to remain so for a while, but there is still underlying uncertainty about the timing and impact of interest rate changes.

“We can therefore expect continuing volatility over the rest of this financial year, which itself will create good buying and trading opportunities. But investors need to be wary of correction when the Federal Reserve, and ultimately the RBA, announce its first rate increase.”

Mr Bryant said that shrewd investors could see the present situation as a good time to take some equities profit by rebalancing into other asset classes or invest any new capital somewhere other than equities.

“While bonds may appear to some as unattractive at the moment, it could be a good time to move some capital there, especially into international bonds and those funds which are able to manage duration and protect capital.

“This will act as a safeguard if there is a major move in longer term interest rates once the increases start.”

Mr Bryant said the Federal Reserve’s decision to hold off on a firm date for any interest rate increases, together with the expectation that the RBA is likely to lower rates again in the next few months, has already had a positive impact on equities.

“However, it must be recognised that it is likely that the US and Australian interest rates will both move up over this year,” he said.

“This could well mean a move of capital out of Australia during this time.”

“The US and other economies are doing far better than Australia, which could also affect domestic equities.

“The US had its best employment growth in 20 years – American business is hiring while in Australia business is still unwilling to hire or invest.

“Conversely, while Australian consumers may appear more willing to spend than they are in America, local retail spending still appears patchy, as evidenced by Myer’s result announcement last week.

“Inflation is low in both economies, arguably too low in Australia, and also there is political uncertainty in both countries.

“Most indicators, and recent history, suggest that economic uncertainty is likely to be with us for some time,” Mr Bryant said.

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