A senior figure at the RBA has turned the spotlight on equities, saying that the asset class remains one of Australia’s largest and most profitable markets despite the risk.
Marion Kohler, the RBA’s head of domestic markets, made the comments while addressing the Australasian finance and banking conference and said that, in the long run, equities will trump other financial assets.
“Over the long run, equities have been worth much more to investors than other investment options: they have returned about 5 percentage points more than long-term bonds on average each year,” she said.
Ms Kohler said that equities had become the largest financial market in Australia over the past 20 years and were an important part of many retirement plans.
“While most people don’t own shares directly, anyone with superannuation usually holds equities indirectly through their fund’s investments. Payments from listed companies, in the form of dividends and share buybacks, were worth almost $100 billion dollars in the past 12 months,” she said.
Ms Kohler said that the reasons behind equities’ popularity was clear as [their] real returns, compared to bank deposits and government bonds, were more than triple.
“If you had put $100 into the equity market when you were 20 years old, given average returns, it would have been worth more than $1,000 when you retired at age 65. If you had invested it in government bonds, it would have been worth only a quarter of that,” she said.
However, investors needed to be aware of the risks as equities were more volatile than other markets, with them being hit particularly hard by the financial crisis, Ms Kohler said.
“If you had a superannuation portfolio based on equities, the value of your retirement funds would have declined significantly and remained lower for quite some time. If you were in, or close to, retirement, you may have had to lock in some of these lower share prices,” she said.
These figures were a sign to investors to manage a diversified portfolio, Ms Kohler said, one that did not rely too heavily on any particular investment strategy.
“This emphasises the value of a diversified portfolio but also the importance of taking a longer-run view on the equity market,” she said.
Ms Kohler said that the RBA paid close attention to equities due to it acting as a transmission channel for monetary policy.
“When interest rates go down, share prices tend to increase, and this increases the wealth of households who hold those equities. Higher share prices, in turn, make it relatively cheaper for companies to issue shares, allowing them to expand,” she said.
Longer term, Ms Kohler said that the market was unlikely to change, with equities still being one of the stronger sources of investment returns.
“Equities will be more volatile than safer assets but will very likely yield higher returns over the long term, and the composition of the market will continue to broadly reflect the structure of the real economy,” she said.
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