Finance Your Budget Savings glut: Investing for growth in a low-interest world

Savings glut: Investing for growth in a low-interest world

investments rate hikes
Investors are looking for new opportunities in a low-interest rate world. Photo: TND
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Australian households squirrelled away an extra $112 billion in savings between January and November as the pandemic encouraged them to tighten their purse strings.

“We haven’t seen savings levels this high in 50 years and at the moment people are playing a ‘wait and see’ game,” said Stephen Anthony, chief economist with Industry Super Australia.

“It could lead to a boom if the economy continues growing and people start to spend.”

But it also means people will reassess their investments, with term deposits unlikely to attract many.

Beyond Today Financial Planning director Antoinette Mullins says that while people are to be congratulated for building a cash buffer, “they should not err on the side of caution”.

“Rates are so low that if you hold too much money in cash it won’t keep up with inflation,” she told The New Daily.

Market volatility

The Australian sharemarket fell 37 per cent during the pandemic scare in March and although it has recovered significantly since then, the All Ordinaries Index is still 3 per cent below its February peak.

BetaShares chief economist David Bassanese said despite some hefty valuations it still presents opportunities.

“The market looks expensive with PEs (price-to-earnings ratios) at over 20 times [compared to the average of 15 times]. But with low rates and strong earnings growth, there is still the likelihood of strong single-digit earnings for the year ahead,” Mr Bassanese said.

Banking and infrastructure, which were hit hard by the bust, are two sectors that offer value to investors at the moment.

The banks in particular “have underperformed for several years and the housing market is recovering and there is no bad debt blowout,” Mr Bassanese said.

Dip into the market with ETFs

Another option for sharemarket exposure that gives great flexibility is exchange-traded funds.

They are bought and sold like shares but are unit trusts that buy into multiple companies within their target exposures.

For example, they might target the Australian or US sharemarkets, or focus more specifically on resources, tech stocks or global indices.

Buying into them gives you exposures you couldn’t get without being a massive fund yourself.

And, as the above chart shows, well-performing ETFs have provided stellar returns in recent years.

A number of funds even managed to produce quite respectable returns during 2020, despite the financial meltdown.

ETFs are a handy option for new investors, or those traumatised by the sharemarket crash.

“You can use dollar cost averaging and put in a small amount each month so you are protected from market volatility,” Ms Mullins said.

“It helps you dip your toe in slowly.”

Although ETFs can be traded online like shares, Ms Mullins said it’s worth asking a broker or adviser to help you develop a strategy.

The housing wild card

Mortgage funds are an alternative option for those looking for high cash returns.

They allow investors to provide finance to property buyers on a first mortgage basis, and are a bit like an ETF for those wanting to play in the banking space.

Investors contribute to a fund that collectively provides the finance for someone to buy a home.

Specialised providers like Balmain Capital and Equity-One provide the wherewithal to investors to participate. Typically, they fund the projects and then parcel the loans to small investors wanting a stake.

If you choose to participate, you need to do your homework to make sure you are happy with the fund and the associated risks.

“If banks are lending out at 3 per cent, and you are getting 7 per cent, that’s because the banks won’t lend to [the buyers],” said Michael Abrahamsson, financial planner with Flinders Private Wealth.

“So, you need to educate yourself and develop knowledge about the fund and the particular project you are lending to.”

Among other things, investors should find out the buyer’s security and loan-to-valuation ratio.

The best funds provide lenders with first mortgage security, which means that if something goes wrong, your loan is repaid before other creditors, much like the bank on your home loan.

Loan-to-valuation ratios under 70 per cent are generally considered reasonable, but the lower the better, as that gives you headroom if the market falls.

“We don’t lend for construction or development, only the value of the land,” Balmain Corporation chairman Michael Holm said.

Minimum investments for mortgage funds are generally $5000 to $10,000, but once you have made an investment, you can generally add more in small amounts.

But remember you are effectively becoming someone’s banker, so get some advice before committing.

Mr Holm said the “funds aren’t liquid”, which means you can’t sell your position early if you need the cash. So be sure you get the term you need.

The New Daily is owned by Industry Super Holdings