Prepare Yourself for the Low Growth, Low Return World

No investor likes hearing ‘expectation’ and ‘lower’ in the same sentence. In a country that’s seen nothing but rising asset prices for eight years, it’s a taboo subject.

But according to UBS, an investment bank, you’ll have to get used to a low growth, low return investment landscape.

It’s a bitter pill to swallow. Especially when you’re accustomed to the opposite. But the environment is changing. It’s no longer practical to accept this is as an investment truism.

The direction the world economy is heading offers few opportunities for growth. Economic prospects, across both developed and emerging markets, are slowing. Finding growth in stocks or bonds is harder than ever. Consciously or not, you’ve realised this.

You’ve seen the carnage playing out on global markets. You’ve witnessed the destruction of trillions of dollars in wealth. From China to Australia, no market has been left unturned.

The ASX 200 lost 8.64% off its market cap in August. It was the fourth worst monthly performance in the past 15 years. The other three? They all came in the wake of the 2008 GFC.

Yet even these losses are negligible by comparison. Chinese investors have lost trillions of dollars in the last two months. The Shanghai Composite Index has lost 45% of its value since June. Every stock market is bound by the same noose.

Weak economic growth across emerging markets, especially China, is the leading concern. Another cloud hanging over markets was the uncertainty around US interest rates.

Pressure is mounting on investors in Australia too.

The earnings season just past was lacklustre by normal standards. Company earnings, led by the big miners and banks, were broadly flat. On top of that, capital raising schemes across the Big Four banks drained the ASX too.

These problems aren’t going away either. Earnings were flat because emerging markets aren’t growing any faster. In a best case scenario, global growth will remain tepid over the coming years.

Because of this, policymakers are revising down growth targets. The RBA says we must shift our expectations of annual GDP growth of 2%.

The same is true of the global economy. The International Monetary Fund recently revised its GDP forecast. It expects global growth to reach 3.3% in 2015, down from 3.5%.

That’s the reality facing investors. Slowing emerging market growth, combined with weak growth across the developed world. Expecting anything but low returns growth is both optimistic, and impractical.

And that’s before we even touch on interest rates.

The low interest rate environment is shifting. When it does, it will weaken global economic growth further. And it will cement the low growth, low return world we’re in.

US interest rates heading up, rest of developed will follow

Every investors is fixated on tomorrow’s US interest rate decision. We’ll know by Friday morning whether the Federal Reserve is lifting rates from its present 0.25% level.

Investors are, rightly or wrongly, feeling nervous. If rates start rising, then low growth and returns may be a staple of the global economy for years to come.

Yet what other option do we have?

The developed world has left interest rates hovering above near zero. Rates across the US and Europe sit at 0.25% and 0.05% respectively. Interest rates can only go up. It’s just a matter of time.

But it’s irrelevant when this reversal begins. What’s important is that it will. Whether that’s tomorrow, or sometime during 2016, makes little difference.

When it does the US, the world’s biggest source of liquidity, will see credit tighten. Liquidity, the mainstay of investor confidence, will disappear. No longer will liquidity spikes boost investor confidence on markets.

And how long will it be before other central banks follow the US in lifting rates? It’s hard to say, but Britain and Australia have signalled intentions to reverse policies in the future.

The era of easy credit is coming to an end.

Work harder, get better returns

You’ll have to invest a lot more intelligently to find strong returns in the future. The low growth, low return future will demand as much. But working harder for your returns could pay off. What won’t work as well is the ‘set and forget’ strategy many investors use. UBS’ Tracey McNaughton explains:

Set and forget is no longer an optimal strategy, it is possible to lose money in equities in a 10 year period and bonds are no longer a risk free asset class’.

In years gone by, any correction on global markets was met with a swift liquidity boost.

Investors became accustomed to investing with a ‘set and forget’ mindset. What was once a one size fits all, safe strategy is now becoming less viable.

Succeeding in this new world will require more effort on your part. Or you could get used to lower returns. The choice is yours.

Mat Spasic,

Contributor, Markets and Money

PS: China’s stock market correction was a wakeup call for many. It was the first big sign that things weren’t right with the Chinese economy. But the panic over China masked many of the problems facing Australia’s stock market.

The Aussie share market had its worst month since 2008 in August. The ASX lost 9% of its value, shedding more than $70 billion.

Markets and Money’s Vern Gowdie saw this coming. He predicted the current market correction at the beginning of the year. But Vern says we haven’t seen the worst of it yet.

He’s convinced the ASX will lose as much as 90% of its market cap in the coming months.

Vern is the award-winning Founder of the Gowdie Family Wealth and The Gowdie Letter advisory services. He’s ranked as one of Australia’s Top 50 financial planners.

Vern wants to help you avoid this coming wealth destruction. That’s why he’s written this free report ‘Five Fatal Stocks You Must Sell Now’. As a bonus, Vern will show you which five blue chip Aussie companies could destroy your portfolio.  You almost certainly own one of them…

To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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