At a regulatory meeting held by the Reserve Bank of Australia on Wednesday, deputy governor Philip Lowe warned investors of a potential liquidity trap emerging in the low interest rate environment. Australian shares rose in the past few days of trading as investors searched for high yield returns. But the RBA is warning that assets in managed funds have grown from 40 per cent of GDP in the 1990s to 125 per cent of GDP this year.
With Australia’s ageing population, fund managers have sought to pool investments together and search for more safe assets with higher and long-term yields. But the RBA has noted that this sector of investments may be unprepared for systematic changes in the global economy. These investments may no longer be “safe havens” once a selloff occurs. Many of the assets in this sector allow investors to redeem funds on short notice, even though the underlying asset in not considered to be liquid. Even further, once a selloff does occur, the assets will become even more illiquid. If the US does raise interest rates, or another significant change occurs, investors may look to redeem these funds and move their assets elsewhere. This is likely to dry up all liquidity in this sector, the RBA has warned.
Investors across the global are speculating on the potential interest rate hike in the US, which will send ripples throughout the global economy. Despite the trouble in the high yield environment in Australia, the RBA said it welcomes the US interest rate increase. “At some point when they raise interest rates the US dollar will probably strengthen further against the Australian dollar,” said deputy governor Lowe. “That's something we would welcome, as we've said a number of times recently.” He also noted that if the interest rate were increased, it would likely follow strong US economic data. "Any sign that the US economy is strengthening is good news, it's good news for us all," he said.
Author: Simon Herrmann
May 27, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.