Invest
3 reasons low inflation could be good for investors
Whether you’re an investor in shares or property, the current low inflation environment could be a positive for gains, suggests a leading economist.
3 reasons low inflation could be good for investors
Whether you’re an investor in shares or property, the current low inflation environment could be a positive for gains, suggests a leading economist.
According to AMP Capital’s head of investment strategy and chief economist, Dr Shane Oliver, lower inflation equals higher price-to-earnings, lifting the price of shares.
A rise in PEs in response to low inflation, provided it's not deflation, makes sense for three reasons, according to Dr Oliver.
“First, low inflation means lower interest rates, which boosts the value of future profits and dividends making shares more attractive. Or put simply, lower inflation and interest rates boosts the attractiveness of higher yielding assets so investors switch into those higher yielding assets, which pushes up their price relative to their earnings, dividends or rents,” Dr Oliver explains.
“Second, low inflation means reduced economic volatility and uncertainty, and hence investors are prepared to price shares on higher price-to-earnings multiples.”
“Finally, low inflation means improved quality of earnings as firms tend to understate depreciation when inflation is high and so overstate actual earnings. So again, investors are prepared to pay more for shares when inflation is low.”
Dr Oliver continued to show that, basically, the same applies in relation to property and other assets in that lower inflation drives higher valuations for them as well.
“This is evident in lower rental yields (or capitalisation rates) as lower inflation and interest rates pushes up the price relative to rents that investors are prepared to buy property at. This has certainly happened in Australian property markets with rental yields falling sharply since the 1980s and 1990s,” he said.
The downside
While it might sound like a positive for investors seeing the value of their assets increasing, the chief economist warns of two downsides.
First, valuations are no guide to timing markets and none of this precludes a correction in shares.
“Second, just as low interest rates and low bond yields mean low prospective returns from cash and bonds, high PEs – or their inverse of lower earnings yields – and lower rental yields for property point to more constrained returns from shares and property on a medium-term basis,” Dr Oliver concluded.
“The bottom line is that while shares may be vulnerable to a correction, the rally in markets does not seem excessive given the low inflation and low interest rate environment.”
About the author
About the author
Shares
The heroic nature of health stocks in 2020
Putting money into health stocks is not only an investment in financial return, it’s also an investment into social impact, a portfolio manager has said. ...Read more
Shares
Emerging markets: 5 pandemic-proof sectors set for growth
As the world continues its migration online due to COVID-19, emerging markets will reap the benefits and open up new avenues of investment for savvy investors, according to an investment management fi...Read more
Shares
JobKeeper sees CEO bonuses rise
The Morrison government’s JobKeeper scheme has been used for corporate welfare and to line the back pockets of CEOs, an opposition minister has shown. ...Read more
Shares
Will BNPL shares continue to rally?
The COVID-19 pandemic has seen a change in customers’ approaches to online retail, creating a tailwind for the “buy now, pay later” sector. ...Read more
Shares
More users than Apple and Netflix: How investors can cash in on a growing trend
With COVID-19 seeing an already active 2.7 billion users spending more time playing video games, the opportunity to invest in the sector has never been greater, an industry expert has advised. ...Read more
Shares
Top 4 tech stocks right now
Tech has been a beacon of light in the US markets of late – so what are the stocks that are doing the heavy lifting? ...Read more
Shares
Qantas profits nosedive 91%: Here’s what it means for Aussies
Qantas’ profits have fallen 91 per cent as COVID-19-induced border closures hammer the airline’s bottom line. ...Read more
Shares
How much is the wagyu and shiraz case costing taxpayers?
ASIC has disclosed the preliminary legal bill for its responsible lending case against Westpac. ...Read more
Shares
The heroic nature of health stocks in 2020
Putting money into health stocks is not only an investment in financial return, it’s also an investment into social impact, a portfolio manager has said. ...Read more
Shares
Emerging markets: 5 pandemic-proof sectors set for growth
As the world continues its migration online due to COVID-19, emerging markets will reap the benefits and open up new avenues of investment for savvy investors, according to an investment management fi...Read more
Shares
JobKeeper sees CEO bonuses rise
The Morrison government’s JobKeeper scheme has been used for corporate welfare and to line the back pockets of CEOs, an opposition minister has shown. ...Read more
Shares
Will BNPL shares continue to rally?
The COVID-19 pandemic has seen a change in customers’ approaches to online retail, creating a tailwind for the “buy now, pay later” sector. ...Read more
Shares
More users than Apple and Netflix: How investors can cash in on a growing trend
With COVID-19 seeing an already active 2.7 billion users spending more time playing video games, the opportunity to invest in the sector has never been greater, an industry expert has advised. ...Read more
Shares
Top 4 tech stocks right now
Tech has been a beacon of light in the US markets of late – so what are the stocks that are doing the heavy lifting? ...Read more
Shares
Qantas profits nosedive 91%: Here’s what it means for Aussies
Qantas’ profits have fallen 91 per cent as COVID-19-induced border closures hammer the airline’s bottom line. ...Read more
Shares
How much is the wagyu and shiraz case costing taxpayers?
ASIC has disclosed the preliminary legal bill for its responsible lending case against Westpac. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
