US interest rates and Australian Markets

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Recent events overseas have certainly proven that the world’s markets are truly global and inter-connected. We have been shown that we are all in a global economy where we are affected by what is happening in other key countries and regions. Over the last two months, we have published updates to help you understand what is happening in markets such as Greece (Greece and the effect on Australian superannuation returns) and China (Global markets and your investments). Also, that it is our view that the recent share market drop should be a short term correction (Investment market update).

Currently, the world has shifted its focus towards growth in the US and the likelihood of a rise in interest rates. On September 17 the Federal Open Market Committee will announce its decision on monetary policy. Since official interest rates reached zero in December 2008, US interest rates have remained unchanged for 53 consecutive meetings. Economic data from the US, including ‘full employment’ with an unemployment rate of 5.1%, indicate September could be the month that US interest rates increase by 25 basis points.

Once the US start raising interest rates this will have a flow on effect on the Australian market. The unknown factors which effect how investment markets react include how quickly rates will rise, how much short term and long term rates will move and what the impact will be on exchange rates. The good news is the US Federal Reserve is taking a conservative approach to date, historically when US interest rates have risen quickly it has caused some short term panic in markets. Overall, we see the US Federal Reserve taking appropriate steps to maintain global growth at reasonable levels and managing key investment market risks.

Generally, a rise in US interest rates will slow US growth and corporate earnings growth. This is expected to slow the capital growth in share returns, and may result in a flat to slightly negative period in US equity market returns. Due to the inter-connectivity of global stock markets it is suggested that the Australian stock market will follow the US stocks. The Australian dollar is expected to continue to fall against the US dollar.

Throughout the current volatility in world markets we will continue to maintain our conservative, high income investment approach with a focus on managing downside risk. Our approach is to position our clients to do well in all markets, and for them to feel peace of mind regardless of what is happening with their investments on a day to day basis.

If you would like to discuss the implications of these factors on your portfolio please contact us to discuss further. We can assist with developing an investment strategy tailored to your situation, or with the review of your existing investment strategy.

 

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About the Author:

Inbam Devadason
Inbam is a Director at Harvest Financial Group, and has been in the financial services industry for twenty four years. He is a qualified Actuary and Financial Planner who specialises in investment and superannuation. During the course of his career, Inbam has advised individual clients, superannuation trustees, corporate executives and company boards. In his spare time Inbam likes to give back to the community by volunteering his financial expertise to charities and non profit organisations. And he certainly keeps busy with his four children aged nine, seven, four and three.