Most Australians have money in the financial markets, but now may be a particularly risky time to invest

The vast majority of Australians have money invested in the financial markets, whether we think about it regularly or not.

From working-age Australians to super young investors new to the market and trading on apps, or those who will never own property – millions of Australians are actively engaged in investing.

Indeed, of those who started investing in the last 12 months, 45% were women, according to the Australian Shareholders Association (ASA).

It’s also been one hell of a ride for investors over the past 24 months as the stock market crashes, recovers and then rebounds.

“Now is not the time to fly too close to the sun,” says professional investor Danielle Ecuyer.

In other words, she says, this is a particularly risky time to invest.

What’s different about saving and investing today is that there’s literally nowhere to “hide” without seriously compromising your return on investment.

Let me explain.

“Now is not the time to fly too close to the sun,” says Danielle Ecuyer.(Twitter: Danielle Ecuyer)

Inflation has changed the game

Policymakers and financial institutions responded to the global financial crisis by pumping billions of dollars into markets, in part to encourage the flow of credit.

Interest rates hit record lows and stayed there for years.

Stock markets have become addicted to cheap money and a unique bull market has taken hold.

For a brief moment, interest rates hit historic lows, with the potential to stay low for years, and governments pumped tens and hundreds of billions of dollars into their economies to keep them afloat.

Young investors with extra cash and those able to dip into their superannuation accounts invested in the stock market.

After months of continued COVID lockdown, by the end of 2020, 46% of Australians (9 million) held investments outside of their homes and pension accounts, according to the ASA.

But fast forward to early 2022 and a war in Ukraine (and its effect on gas prices), continued rising business costs, and shoppers with cabin fever spending their hands in stores. …and you have rising inflation.

Basically, this high inflation has, technically speaking, no end point.

Of course, it will eventually peak, but we don’t know when it will, and it may take much higher interest rates to tame it.

This uncertainty creates enormous volatility in the financial markets.

Every corner of the market is uneasy

Can you see where I’m coming from?

They call it the “macro” economy. It is the interrelationship between household spending, government, business and how inflation and interest rates react.

The “macro” environment has become particularly strange. We have rising inflation, falling consumer confidence, rising interest rates and unstable financial markets – an awful combination of forces.

A line graph depicting consumer confidence since 2014
Consumer confidence fell 1.3% last week, its fourth consecutive weekly decline.(Supplied: ANZ)

AMP’s chief economist, Shane Oliver, currently masters a cross-section of assets and their outlook, and it’s not pretty.

“Equities are expected to see continued near-term volatility as central banks continue to tighten to combat high inflation, the war in Ukraine continues and China’s COVID lockdowns take their toll,” said Dr. Oliver.

“Continued low yields and capital loss from further rising yields should lead to persistent negative bond returns.

“Unlisted commercial properties may see some weakness in retail and office yields as online retail activity remains well above pre-COVID levels and office occupancy remains well below pre-COVID levels.”

Shane Oliver in his home office in Sydney in November 2021.
Stocks are expected to experience continued near-term volatility, says AMP Capital chief economist Shane Oliver.(John Gunn.)

And, adds Dr Oliver: “Australian house price gains are expected to slow further, with average prices falling from mid-year onwards due to the impact of poor affordability, rising mortgage rates and of the increase in registrations.

“Cash and bank deposits are likely to provide mediocre returns, given the extremely low cash rate of just 0.1% currently, but are expected to rise as the RBA raises interest rates,” he said. he declared.

Deposit returns are “poor”

In decades past, when the stock market got too risky or scary, savers could always withdraw to the good old trusted bank account and earn a few percentage points on their investment.

Now, most standard deposit accounts from the big four banks will yield less than one percentage point.

Some of the big banks are marketing their time deposits as an alternative, but many Australians don’t want to lock up large sums of money for an extended period at this time.

It’s a very unusual time. Interest rates are rising fast enough to seriously spook markets offering relatively high yields, but they are not high enough to bring bank deposit yields to normal levels.

Is there a way out?

The sting in the tail here is that we just don’t know how high inflation is going to get.

So, for now, financial market volatility is likely to continue.

Both major parties are proposing to make home ownership easier for various groups of Australians, but many economists fear the policies will only increase demand for housing and drive up prices.

And even if the Reserve Bank aggressively raises the cash rate target in the coming months, deposit account rates are unlikely to rise above a full percentage point.

It’s not just geopolitical unrest and the pandemic that are creating unease for households across the country. There is also nowhere to hide for millions of Australians connected in one way or another to the financial markets: people who want to grow their savings… and sleep comfortably at night.