Head of investment strategy at UBS Asset Management Tracey McNaughton said workers, consumers and business leaders have been weighed down by what she called the ‘fear factor’ since the global financial crisis.
Business investment has been “lethargic” worldwide, and inflationary pressure continues to evade the world’s developed economies – as indicated by Australia’s low inflation reading last month, Ms McNaughton said.
On the consumer side, the savings ratio in Australia has averaged 9.8 per cent of income since the GFC, more than double the average of the 20 years prior to 2008 (3.9 per cent), she said.
“Just as the Great Depression left lasting scars on the household psyche, the GFC has left workers, consumers and business leaders fearful and conservative,” Ms McNaughton said.
“Yield-hungry” conservative investors are encouraging companies for paying dividends and conducting stock buy-backs instead of undertaking new capital investment, she said.
“The preference by corporates for dividends is putting downward pressure on new investment spending, thereby undermining potential growth in the future,” Ms McNaughton said.
Somewhat ironically, low interest rates are turning fixed-income assets into long-term investments and making equity assets more short-term in nature.
“Lower interest rates reduces the cost of debt and so encourages government and corporations to issue longer dated bonds,” she said.
“As a result of this, the average duration for most bond indices has increased significantly since the GFC, making these investments more sensitive to changes in market interest rates.
“Based on current yields and assuming no uplift from capital growth it would take an investor in the Australian bond market 22 years to double their investment. The equivalent for an investor in Australian equities is 10 years,” Ms McNaughton said.
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