Australian asset managers will be aggressively buying yield assets as the US Federal Reserve has delayed further interest rate increases for a year, according to Clime Asset Management.
The Fed overnight said it would not be raising interest rates this year, with only one hike in 2020, along with acknowledging the US economy is slowing.
The central bank has forecast growth of 2.1 per cent in 2019, a decrease of 0.2 per cent from their forecast three months prior, and it estimated that growth will slow again to below 2 per cent next year.
The announcement will cause interest rates to compress and a reduction in bond yields, along with creating competition for yield assets, John Abernethy, chief investment officer at Clime, said.
“A significant problem is emerging for big asset and pension managers who need to get a sustainable yield at reasonably low risk,” Mr Abernethy said.
“They have traditionally sought this from the bond market, but that opportunity has been taken away from them.
“The major asset managers, particularly in Australia, will aggressively buy yield wherever they can. Away from equity markets, quality yield will be strongly bid.”
Mr Abernethy predicted that the big investors, including pension funds, will be looking to switch into the likes of corporate debt, hybrids, direct property, mortgage fund and mortgage-backed securities.
“Australian bonds have already rallied with yields just 10 basis points above their all-time lows in the wake of the Fed’s move,” he said.
“Returns from equity markets will now be substantially yield driven.”
Self-directed investors will need to shift into yield assets quickly before they are crushed by the stampede of big investors, Mr Abernethy added.
“If self-directed investors were thinking that interest rates were going to rise in the foreseeable future, it’s not going to happen,” he said.
“They can’t rely on the hope that interest rates on term deposits will rise anytime soon.
“Self-directed investors have to utilise their flexibility and move quickly into similar assets before the big funds move more aggressively into direct property, mortgage funds and corporate debt.”
But Mr Abernethy noted that moving away from equities and cash does create additional challenges and risks.
“That’s where wealth advice is needed to understand the true risk profile of the investor to ensure that it is consistent with the risk profile of the investment,” he said.
“An investor must clearly understand the cash flows coming off each individual investment, its propensity to grow and the risk – even if low – of disappointment.
“And most importantly, construction of a balanced portfolio must now be more tilted to yield in response to the Fed’s announcement.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah spent her career working in business-to-business media, including print and online, as well as cutting her teeth on current affairs programs for community radio.
Sarah has a dual bachelor's degree in science and journalism from the University of Queensland.
You can contact her on [email protected].
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