UNCERTAINTY………CASH & COMFORT

The SIS Act requires Self-Managed Super Fund SMSF trustees to maintain a diversified portfolio.

Given this, Australian bank deposits (i.e. cash) could reasonably be expected to make a significant contribution to a diversified portfolio, fulfilling liquidity and risk management functions.

Times of uncertainty typically drive investors to safe harbours such as cash, however SMSF trustees still have the responsibility to act in the best interests of members with investment performance one of those responsibilities.

Stock Market and Housing Price Concerns

Is the current market uncertainty warranted?  Your thoughts might be close to home as you contemplate Sydney and Melbourne housing prices, leading you to wonder how long will it be before the RBA increases interest rates to contain housing price inflation?

Further afield, you might be curious about the US, still the world’s pre-eminent economy with a stock market at record highs.

Questions raised:

  • Do fundamentals, monetary expansion, or share buy backs explain the unprecedented S&P500 highs?
  • Is the US stock market valuation justified?
  • How (and when) would a US stock market correction affect global markets?
  • Why is the Shanghai Composite Index below its 2008 highs?

Economic growth does not necessarily translate into benefits for foreign investors.  For example, China’s gross domestic product (GDP) is meeting economists’ expectations; however, reliable investment mechanisms are required for SMSF investors to participate in another country’s economic growth.

The best solutions can be local.  Sound governance, regulation and protection underpin reliable investment; all of which are fortunate attributes of the Australian banking sector. SMSF investment in cash should not come as a surprise.

Rising Inflation and Interest Rates

Recent US Federal Reserve (Fed) rate increases are small, but notable as the first since the Global Financial Crisis (GFC).   Further President Trump’s economic policies appear to support a tolerance for higher inflation.

In time, Fed interest rate increases might signal a change in trend that gives the RBA room to increase interest rates. Australian interest rates are high in comparison to many countries, so a unilateral increase risks strengthening the AUD.

A stronger AUD is undesirable because it increases the cost of our exports, but rising inflation and interest rates enhance cash returns as short-term rates exceed long-term rates (i.e. yield curve becomes negative).

2017 – Too Early to Tell

We do not know how 2017 will play out – that is the nature of uncertainty. A case could be made for interest rates going up, staying the same or falling.

For some investors, a bigger cash allocation could make sense, however the SMSF trustee still has the responsibility to maximise returns in an asset class made up of equivalent risks.

The Innovation Solution

Innovation is the certain bright light.  Local Fintech solutions have made maximising cash returns easier. Shifting cash into deposits offering a competitive return can be actioned simply with a few strokes of the keyboard.

For SMSF Trustees, ensure that your investment platform allows easy cash transfers with a choice of Approved Deposit Institution (ADI) offers.

Remember performance doesn’t have to stop when uncertainty increases and investors seek comfort in cash – it can be the start!

 

About the Writer
Faxts Media specialises in digital content services. The writer is a financial market economist with extensive experience gained in a variety of global financial markets, investment and risk management, and economic analysis roles. More recently, the work involved securities market development for a couple of Asian governments. He has a special interest in the global economy and income and bonds markets.

Definitions

  • Superannuation Industry (Supervision) Act 1993 – Subsection 52 (6)
  • S&P500 – The Standard &Poor’s 500 is an American stock market index based on the market capitalisations of 500 large companies having common stock listed on the New York Stock Exchange.
  • Shanghai Composite Index (SEE) – the stock market index of all stocks that are traded at the Shanghai Stock Exchange.
  • US Federal Reserve – The Federal Reserve System is the central banking system of the United States.  It aims to provide the US with a safe, flexible and stable monetary and financial system.

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