The crunch at the end of the asset honeymoon

Australians now realise it is highly unlikely that interest rates are going to rise until well into 2015 and perhaps a lot longer. And last night European investors bid up Italian bonds, underlining that this is a global as well as a local sentiment.

As a result, in Australia we are watching a fundamental change in the investment strategies of many people, led by self-managed superannuation funds. Savings are being taken out of bank deposits and invested in the share and property markets, with the sharemarket experiencing the influx of money via new issues.

If the trends continue then we are going to see a further increase in asset prices and eventually a breakout of inflation. When that happens, interest rates will almost certainly rise and there will be a crunch in asset values -- but that’s a way off.

For the last year or so the yield action has been concentrated on the banks and Telstra. But now market action is becoming much wider and our sharemarkets are being given a boost by big takeover bids like the Treasury Wine battle.

At the same, time new floats that have been on the shelves for years are being rushed onto the market, absorbing the buying power created by the switch out of bank deposits.

Similarly, we are seeing unlikely events where companies like Transurban undertake an enormous capital raising which would normally see the stock fall, but instead the stock rises. In the case of Transurban, the takeover of Queensland Motorways highlighted its yield.

Transurban is one of a number of infrastructure companies that are attracting bank deposit money as well as takeover bids, as we see with DUET and Envestra. Similar events are taking place in other high-yielding stocks that have issues.

Interest rates are likely to stay down because our economy is being hit with several blows. First, we have a budget that is taking money off the table, and at the same time the constant fighting of the politicians lowers consumer and business confidence. Consumers are nervous because they know that there are three employment tsunamis ahead: the rapid decline in mining investment, the switch to online retailing and the closure of the automotive manufacturing industry. They will start to bite later this year but will be severe in 2015 and 2016. Outside the public service it is very hard to get wage rises, and public servants are losing their jobs.

Abbott should never have attempted a tough budget without a vision for the future (Tony Abbott’s big budget mistake, May 19). None if this means a collapse, but it will affect consumers and keep a lid on the economy -- and interest rates particularly -- as it will take time to generate the infrastructure spending.

At the same time, the drive from China that stimulated the economy during the global financial crisis is not likely to be repeated. The fall in the iron ore price is a proxy for the adverse changes in China. In many ways the same thing is happening in many other parts of the world. Interest rates in the US, Europe and Japan are being artificially depressed, but there is no boom.