With interest rates expected to move lower in 2019 and a growing number of Australians joining the active retirement base each day, the hunt for investment-led income will become more pressing, a strategist has said.
Raf Choudhury, a senior investment strategist with State Street Global Advisors, has highlighted that traditional assets are no longer delivering returns due to a tough investment climate.
Just seven months ago, most expectations were that, given global synchronised growth, central banks were more likely to be raising rates at this point in time of 2019, the strategist outlined.
“However, more moderate growth in 2019, along with a continued lack of inflation (globally), has led to a change in expectations,” Mr Choudhury said.
He noted this as being reflected in the consecutive cash rate cuts – to a historically low 1.00 per cent in early July.
As a result of a lower for longer environment, traditional assets that an investor could once turn to are no longer delivering the income or yield that they used to, with Mr Choudhury giving the example of a term deposit.
He also flagged a compression in yields for Australian bonds “being broadly in line with the cash rate”, with the current yield on 10-year Australian government bonds sitting at 1.5 per cent as of 3 June 2019.
For Mr Choudhury, this is another indication that cash rates are still in decline.
As a result, the strategist urged investors using their investments as an income source to reconsider how they may best position their portfolio to drive income when traditional assets are not able to deliver the returns they once did.
Some solutions for investors
Investors looking to balance risks associated with reaching further down the risk spectrum in their “search for yield” are now looking for multi-asset solutions, Mr Choudhury said.
Mr Choudhury said that investors with the willingness to take on some additional risk could find high dividend yield equities a good source of income, since dividend yields have historically remained relatively stable.
“These exposures can be blended with corporate bonds (a relatively defensive investment) and government bonds and cash to help generate a meaningful income yield while moderating the overall level of risk,” he explained.
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