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Posted July 9, 2018 by MoneyLink

Outlook for Super and Investments Sound

Last week the Australian Stock Exchange hit a new ten year high, a post global financial crisis peak. The Accumulation Index including dividends is well ahead of 2007 levels but the Price Index is still short of its 2007 high.

This seemed to boost the number of commentaries warning of a possible market downturn. A committee of the world’s central banks warned that a sudden increase in interest rates may become necessary in the next few years.

Some economists worry that the US tax cuts introduced by President Trump will add fuel to an already blazing fire when it isn’t needed. With unemployment at a forty-year low wage demand inflation could take off.

What about world debt levels?

Some analysts worry about debt levels around the world. One says the Reserve Bank should not be keeping interest rates so low. They warn it could cause a surge in inflation and a jump in rates which could lead to a recession in the 2020’s.

Some stock brokers say after ten years of gains we must expect a reversal, especially in the US after a dream run for shares.

What is our interest rate outlook?

The Reserve Bank’s twin objectives are to achieve full employment while keeping inflation low. Inflation is low but unemployment is above target. If inflation does start to rise the RBA will raise interest rates to combat it.

That isn’t needed yet but if wages do rise much rates will go up. In the us around four per cent, close to full employment. Wage rises are boosting inflation so the Fed is tapping on the brakes to moderate the booming economy.

The European economy is doing quite well. The Central Bank isn’t raising rates yet but is withdrawing its stimulus measures.

Australian company profits have increased over the last year after a slow period. The June half year results out next month are being keenly awaited. Analysts expect profits to rise further, lifting dividends and share prices.

President Trump is a threat to global trade. Protectionism slows trade and retards incomes and living standards. China may win the trade war as it probably has more fire power than the US due to central government control.

It could deliberately weaken the yuan to make Chinese goods cheaper for overseas buyers and counteract the effect of the Trump tariffs. The US can’t do that as the Fed is independent of the Government.

Be optimistic, but retain some defensive investments too

Our current low interest rates mean low borrowing costs for consumers and businesses. Skill shortages are not serious due to higher unemployment. Business conditions are good. It’s a time to be moderately optimistic but retain some defensive investments too.

This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.

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