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Investors are abandoning cash: how will they keep earning in the low-rate environment?
The Reserve Bank of Australia (RBA) has made history again, cutting interest rates to a historic 0.5 per cent after weeks of market turmoil in the wake of coronavirus. In 2019, the RBA made three rate cuts in June, July and October.
In February, Governor Philip Lowe said that if the unemployment rate is trending in the wrong direction and Australia doesn’t make further progress toward the inflation target, the RBA would see a stronger case for further monetary easing.
Some commentators are predicting another 0.25 percentage point cut in by April. That would bring the cash rate down to 0.25 per cent, which means investments like bank deposits will likely trail the inflation rate by 1.75 percentage points.
The low-interest rate world provides a clear catalyst for investors to explore better options for yield, and protect their cash from going backwards.
Investors find themselves asking: how do I keep my investments performing?
In this regard, fixed income investments may be an attractive option for investors looking for a steady income stream and seeking to stay ahead of the curve during low-rate environment.
The peer-to-peer investing opportunity
Peer-to-peer (P2P) lending businesses, such as RateSetter, allow retail investors to tap into the attractive asset class of consumer credit at a time when other fixed income assets deliver lower than historic income/yield.
P2P lending, or marketplace lending, allows people to invest in a portfolio of consumer loans. P2P lending takes place via an online platform that matches investors’ funds to approved, creditworthy borrowers.
RateSetter conducted a survey in February to see how over 1,100 retail investors are responding to the low-rate environment. The results showed 74% of respondents confirm that low rates will impact how much cash they keep in the bank. So how will they keep earning?
Survey respondents said diversification was their top motivator for new investments in 2019 (25%), followed by low-interest rates (21%) and concerns about investment performance (17%). Over 32% of respondents said RateSetter was their largest new investment in 2019, beating out ETFs, shares and property.
The research shows yield-hunting investors are sticking with the investments that have served them well. Over 46% of respondents said they increased their existing allocation to RateSetter in 2019.
How RateSetter’s returns compare
*Annualised asset class returns as reported by Morningstar for the 5 year period to 31 December 2019. RateSetter data not provided by Morningstar. Please see below for a full explanation of how the asset class and RateSetter returns are calculated. Warning: Past performance is not a reliable indicator of future performance. Different investments reflect substantially different risk profiles.
Author: Daniel Foggo, RateSetter CEO
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