Central Bank Watch – October 2014

Principal Global Investors has released its monthly Central Bank Watch for October 2014.

The report outlines key concerns of the Reserve Bank of Australia which includes the slowing momentum in the Chinese economy, the strength of the Australian dollar and commodity prices.

The report includes graphs and analysis of current monetary policy in the US, England, Europe, Japan and Canada.

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The report outlines key concerns of the Reserve Bank of Australia which includes the impact of fiscal consolidation on growth, the strength of the Australian dollar, in addition to the outlook for mining investments which is expected to fall sharply.

It also highlights that the RBA has continued to maintain a neutral policy stance and is likely to policy rates this year.

The report includes graphs and analyses of current monetary policy in the US, England, Europe, Japan and Canada.

To read the entire report,  click here.

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Interest rate announcement a blow for retirees.

The Reserve Bank of Australia’s decision to keep official interest rates on hold for the ninth consecutive month was expected but still came as a blow for income-hungry retirees grappling with falling term deposit rates and volatile equity markets.

The last movement in rates was in August last year when the RBA cut rates to 2.5 per cent. As a result, the yield on some term deposits will effectively be nil after inflation.

Given the cash rate is expected to remain at record low levels for an extended period of time, retirees and other income-focused investors should consider diversified fixed income strategies, according to leading investment research company, van Eyk Research.

van Eyk chief executive Mark Thomas said diversified fixed income funds were an increasingly attractive alternative to term deposits.

He added that skilful, active managers deliver comparable levels of income to equity income funds and real estate investment trusts but with considerably lower volatility.

“The world is still a risky place and bonds still represent a relatively low-risk source of income for retirees and other income-focused investors,” Thomas said.

“An actively-managed diversified fixed income fund can provide both income and capital preservation with the potential for some capital growth. This is important because many people will spend 20 years or so in retirement so they also need some exposure to growth assets to fight inflation and ensure they don’t run out of money.

van Eyk Research has been successfully managing its diversified fixed income strategy since 2008. The group’s investment philosophy is based on the belief that active management and the ability for managers to invest across the entire fixed interest universe is essential to managing the growing risks in bond markets.

van Eyk deputy chief investment officer Rob da Silva said challenging market conditions coupled with the surging number of baby boomers in, or nearing, retirement made it imperative for fund managers and financial advisers to help their clients build robust portfolios which provided a regular stable income

“There are warnings that bonds are too expensive and there may even be a bond bubble, which is why we select active managers who have a proven ability to add value by reducing exposure to certain parts of the bond market when valuations become stretched and increasing exposure when valuations become attractive,” da Silva said.

“The managers we have selected also have a broad mandate to look across all the opportunities in bond markets such as sovereign and corporate bonds, syndicated loans, emerging market debt and other credit opportunities.”

The van Eyk Blueprint Diversified Fixed Income Fund aims to provide a reliable, relatively stable yield over the return on term deposits with a sharp focus on capital preservation.

The Fund invests in seven underlying funds, representing the best ideas of the group’s rigorous investment research and innovative approach to portfolio construction.

About one third of the Fund is allocated to absolute return bond funds, releasing managers to use active management to pursue positive returns regardless of the overall market direction.

The van Eyk Diversified Fixed Income Fund includes Bentham, Macquarie Group and GAM as underlying strategies. 

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Income story: is growth and returns possible?

Regardless of whether improving economic data prompts the Reserve Bank of Australia (RBA) to keep official rates on hold tomorrow, interest rates will remain at historic lows. So should income-seeking investors consider moving out of dividend stocks and seek capital growth as global economies pick up?

“Worldwide economic indicators are definitely improving, and with the property market also showing signs of life, most analysts would be surprised to see the RBA cut rates next week,” says Stephen Thornber, Portfolio Manager, Global Equity Income, at Threadneedle Investments. “In fact, if global economies continue to improve, at some next year point rates may even be lifted.”

Nonetheless, Mr Thornber says that a dividend income-based strategy can offer investors both a high yield and the potential for capital growth.

“Investing in dividend stocks doesn’t have to mean that the potential for capital growth is compromised,” he says. “In fact, the last two decades have shown that investing in companies which pay high dividends actually results in superior total returns.”

Talking about the effects on income-based strategies of better global economic data, Mr Thornber said that by focusing on dividend paying companies that are growing, investors can participate fully in rising markets.

“Traditionally income strategies have been a defensive investment, but a new generation of funds have been successful in both protecting capital during market weakness, while keeping up with rising markets – as we have seen this year.”

Equity income investing has grown in popularity as retirees seek alternatives to bonds and term deposits, which are less attractive as inflation rises.

“Equity income provides a good hedge against inflation, which is particularly valuable in an environment of quantitative easing as we have seen in recent years,” he explained.

In a low-growth world companies are using dividends not only as a means of rewarding investors, but also to demonstrate financial strength and draw new investors.

“A robust balance sheet means that a business can sustain rising dividend payments, weather potential economic storms, and invest in profitable growth,” Mr Thornber said.

Mr Thorber continued by saying that the volatility risk of owning equities can, to some extent, be offset by being prepared to invest for the longer-term, allowing the benefits of a rising stream of income to drive value creation.

“The right equities can deliver both yield and growth with manageable levels of risk,” he said.

At Threadneedle, meeting companies and conducting fundamental research lies at the heart of the stock picking process. This bottom-up stock analysis is then combined with thematic insights and overlaid with macroeconomic factors gleaned from colleagues working across all investment classes.

Mr Thornber concluded by saying that he expects continued growth in the global equity income sector in the years ahead, as the dividend culture gains momentum in world markets, and an ageing population continues to focus on yield.

“With the right stocks, investors should absolutely be able to expect strong and consistent income as well as capital growth as markets improve,” he said.

The Threadneedle Global Equity Income Fund (Unhedged), an Australian registered investment management scheme which invests in the actively managed Threadneedle Global Equity Income Fund, is available in Australia via Certitude Global Investments.

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Principal Global Investors released its monthly Central Bank Watch for August 2013.

Principal Global Investors yesterday released its monthly Central Bank Watch for August 2013.

Rates are expected to remain low throughout 2014 and the report suggests that the Australian economy could do with additional policy stimulus to address the risks posed by the slowing Chinese economy and the sluggish non-mining recovery.

The report includes the analysis of current monetary policy in the US, England, Europe, Japan and Canada.

To read the full report, click here.

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