When we construct or review financial plans for clients, we know that the Australian economy does not exist in a bubble.
What’s happening worldwide will definitely impact upon the performance of each investment portfolio, and we take this into account when formulating our wealth management ideas.
Research suggests there are likely to be some significant changes ahead. So in this short article, we’ve distilled the major global economic trends to give you a heads-up about what’s predicted for the next few years or so.
This will give you a quick overview of the forces that may influence the investment strategies we develop or refine for you.
Global Economic Growth
World economic growth is likely to remain frustratingly fragile for some time. Real GDP rates have marched lower for years – since well before the GFC – with population and productivity growth rates both falling to levels less than half those of the 1950s to 1970s.
And while the US economy is expected to be more resilient, it’s not immune to the downside (and growing) risks in Europe and China.
We mention these three economies because collectively they account for more than half of the total world economy (US = 22%; Euro = 17% and China = 13%) – so what happens to them is likely to have a trickle-down effect elsewhere.
Inflation/Deflation and Interest Rates
For those of us who grew up in the years when inflation seemed an economic fixture, today most developed countries now face a deflationary threat.
Many governments have responded by reducing official interest rates (in some cases to generational lows) to stimulate the economy. An exception could be the US Federal Reserve – one of the few central banks expected to raise rates in 2015.
These forces influence investment performance in a number of ways.
First of all, lower interest rates feed through to returns offered on investments such as treasury bonds and this can have a knock-on effect to other investment classes.
Secondly, deflation helps to buffer the effects of lowered rates of return. This is because money is not decreasing in value, as would be the case during times of inflation.
Australia makes up 2% of the world economy so naturally what happens in the remaining 98% is bound to impact on the state of affairs here.
Our projected annualised real potential growth in GDP is nearly 3% for the next five years.
Specifically, Australia is currently in transition from mining-led to broad-based growth. As our major trading partner, China’s economic growth is in a protracted but gradual downward shift, although it’s unlikely to result in a hard landing.
While unfortunately we don’t have a crystal ball, we do have access to research houses that wrestle big data into meaningful insights.
And what we’ve learned tells us that it’s fair to say that the recent buoyant returns achieved in the areas of stocks and property may become more muted in the next ten years in response to the trends mentioned above.
However it’s our job to stay across this – and we do.
We draw on a wide range of market research so we can develop effective strategies for our clients. In doing so we keep a close eye on global and domestic economic trends that may affect performance. And where necessary, we make adjustments to help maximise what can be achieved.
At the same time however, it’s important to remember that the underlying investments we recommend are just one facet of your wealth management plan.
Other factors include:
- Identifying the best mix of asset classes to select based on your tolerance to risk and your investment timeframe
- Choosing the right ownership structure to assist you in minimising tax, protecting your assets and safeguarding liquidity
- Knowing about opportunities for entitlements or pathways that offer benefits to you (such as capitalising on tax advantages available through your super fund)
- Using low cost methods of investment to maximise the lifetime return you earn
- Matching your strategy to your short and long term goals to position you as well as possible to achieve them.
Clients of 5 Financial will know that we spend a lot of time on each of the above points and more.
Our goal is to help you get ahead – and stay there.
If you’d like to discuss any of the ideas mentioned in this article, we’d be pleased to assist. Contact us to learn more.