The vast majority of Australians have money invested in the financial markets, whether we regularly think about it or not.
Working-age Australians with super, younger investors new to the market and trading on apps, or those who won’t ever own property — millions of Australians are actively engaged in investing.
Indeed, of those who began investing in the past 12 months, 45 per cent were women, according to the Australian Shareholders Association (ASA).
It’s also been one heck of a ride for investors over the past 24 months as the stock market has crashed, recovered and then bumped along.
“Now is not the time to fly too close to the sun,” says professional investor Danielle Ecuyer.
In other words, she says, it’s a particularly risky time to invest.
What’s different about saving and investing today is that there’s literally nowhere to “hide” without seriously compromising your return on investment.
Let me explain.
Inflation has changed the game
Policy makers and financial institutions responded to the global financial crisis by pumping trillions of dollars into markets in part to encourage the flow of credit.
Interest rates dived to record lows and stayed there for years.
Share markets became dependent on cheap money and a once-in-a-generation bull market took hold.
For a brief while, interest rates were at record lows, with the potential of staying low for years, and governments pumped tens and hundreds of billions of dollars into their economies to keep them afloat.
Younger investors with extra cash, and those able to draw down on their superannuation accounts, invested in the share market.
After months of rolling COVID lockdowns, by the end of 2020 46 per cent of Australians (9 million) held investments outside their home and superannuation accounts, according to the ASA.
But fast forward to early 2022 and a war in Ukraine (and its effect on petrol prices), ongoing rising business costs, and shoppers with cabin fever spending hand over fist at the stores… and you have rising inflation.
Crucially, this elevated inflation has, technically speaking, no end point.
Of course it will reach a climax eventually, but we don’t know when that will be, and it may require much higher interest rates to tame it.
This uncertainty is created enormous volatility in financial markets.
Every corner of the market is uneasy
Can you see what I’m getting at?
They call it the “macro” economy. It’s the inter-relationship between household spending, the government, businesses and how inflation and interest rates respond.
The “macro” environment has become particularly odd. We have rising inflation, diving consumer confidence, rising interest rates and wobbly financial markets — an ugly combination of forces.
AMP’s chief economist Shane Oliver has a handle on a cross section of assets and their outlook right now, and it’s not pretty.
“Shares are likely to see continued short term volatility as central banks continue to tighten to combat high inflation, the war in Ukraine continues and Chinese COVID lockdowns impact,” Dr Oliver says.
“Still low yields and a capital loss from a further rise in yields are likely to result in ongoing negative returns from bonds.
“Unlisted commercial property may see some weakness in retail and office returns as online retail activity remains well above pre-COVID levels and office occupancy remains well below pre-COVID levels.”
And, Dr Oliver adds: “Australian home price gains are likely to slow further with average prices falling from mid-year as poor affordability, rising mortgage rates and rising listings impact.
“Cash and bank deposits are likely to provide poor returns, given the ultra-low cash rate of just 0.1 per cent at present but it should rise as the RBA raises interest rates,” he says.
Deposit returns are ‘poor’
In decades past, when the share market became too risky or scary, savers could always retreat to the good ol’ trusted bank account and earn a few percentage points return on their investment.
Now, most standard deposit accounts from the big four banks will return less than a percentage point.
Some of the major banks have been marketing their term deposits as an alternative but many Australians don’t want to lock up large amounts of cash for an extended period right now.
It’s a highly unusual time. Interest rates are rising fast enough to seriously spook markets offering relatively high returns, but they’re not high enough to lift bank deposit returns to anything like normal levels.
Is there any way out?
The sting in the tail here is that we just don’t know how elevated inflation will become.
So, for now, financial markets volatility is likely to continue.
Both major parties are offering to make home ownership easier for various groups of Australians, however many economists are concerned the policies will only add to demand for housing, and push up prices.
And even if the Reserve Bank increases the cash rate target aggressively in coming months, deposit account rates are unlikely to rise above one percentage point.
It’s not just geopolitical unrest and the pandemic that are creating unease for households across the country. There’s also nowhere to hide for millions of Australians connected, in some way, to financial markets: people who want their savings to grow… and to sleep comfortably at night.