Why now is a good time for Aussies to invest

While rising interest rates have left Aussies worried, one expert believes there’s never been a better time to start investing.

With a cost-of-living crisis colliding with skyrocketing interest rates to all but cripple many Australian budgets, thoughts of investing have been put on the back burner for many.

“In terms of the very short term – and by that I mean the next couple of months – I think that the volatility in financial markets will probably return a bit,” explains Peter Dragicevich, market strategist with Corpay Cross-Border Solutions.

“We’ve had this really extraordinary run of central banks raising rates around the world, and that looks like it’s coming to an end for now – we’re very close to reaching a peak,” he said.

“But what we haven’t really seen yet is the economic impacts of all of that tightening. The RBA has research that found that the economic impacts of rate changes don’t fully kick in for about four to six quarters afterwards.”

“So the full impacts of all that tightening is probably going to kick in over the next couple of months. Those rate hikes are going to start to bite in terms of household budgets and spending and investment.”

Dragicevich believes there will be some emerging themes over the next few years providing opportunities for the savvy investor – and a lot of them are closer to home than we might realise.

Peter Dragicevich, market strategist with Corpay Cross-Border Solutions. Picture: Supplied.

Net zero = net beneficiary

The global move towards renewables has created new demand in commodities markets, a demand that sees Australian companies hold a strong position.

“As the world tries to move to a net zero, there’s a big theme of electrification and decarbonisation,” he says. “And that’s actually quite a big positive for commodities. There’s a lot of copper and lithium and nickel that needs to go into all of that, and Australia is actually a net beneficiary from that side.”

“Our commodities producers are well-positioned to deal with this, and we produce a lot of the materials that people are going to need over the next few years as we move towards a more decarbonised world.”

And net zero goals notwithstanding, Dragicevich says the current financial climate makes for a strong commodities market – more good news for Australia.

“Generally speaking, as we’ve seen over the last year or so, even if you take out the whole decarbonisation theme, commodities tend to do well in a higher inflation environment, because they provide a bit of a hedge to inflation from an investment perspective.”

The market will see a surge in homegrown manufacturing. Picture: iStock.

Onshoring means more homegrown investment opportunities

The financial expert says that the hangover from Covid supply chain interruptions and the realisations they brought to the market will see a surge in homegrown manufacturing.

“Over the next few years, I think we’re likely to see a lot more onshoring of manufacturing, shifting away from the way we have previously operated in terms of the supply chain networks, to give people a bit more kind of insurance and flexibility. And typically, that will also imply that costs will go up.”

He adds that while in the past few decades the trend has been to “find the cheapest manufacturer wherever it is in the world and go there,” things are starting to move in the opposite direction.

“Geopolitical tensions and risks also support the onshoring theme,” he adds, “you don’t want to be overly exposed to one country and then have relationships sour.”

Interest rate hikes shuffle the leaderboard – but cash and bonds win out

One of the major casualties of higher interest rates in the market, Dragicevich believes, will be the very companies that have outperformed during the pandemic.

Businesses that outperformed in the pandemic are set for major casualties following interest rate hikes. Picture: iStock.

“A lot of tech darlings benefited from zero interest rates, and then got another leg-up during Covid and the work-from-home period,” he explains.

“They’ve now had to adjust to a higher interest rate environment, and for a lot of those companies, the valuations have had to come down because as interest rates go up, you discount your future cash flows at a higher cost of capital.”

David Bassenese, chief economist at Betashares, says this volatility is good news for folks interested in more conservative long term growth strategies.

“At least one positive to emerge for investors from the current concerns with inflation is that income returns from relatively more defensive assets – such as cash and bonds – have improved over the past year,” he says.

“For years central banks kept interest rates at near-zero levels to boost inflation, which meant many investors were forced into the volatile equity market to earn decent levels of income. Now they are at least getting better rewards should they wish to leave their money in a bank or fixed-income bond fund.”

The healthcare industry is also set to boom. Picture: iStock.

Back to basics

Something Dragicevich does believe will continue to perform however, are the basic components of society. For one, he says, healthcare is set to boom.

“Covid also exposed that we under-invested globally, in terms of health care. In a lot of countries, healthcare wasn’t up to scratch, which is why in places like China they’ve had to have this extended period of very harsh lockdown, because the healthcare system really couldn’t handle it.”

“I think over the next five to 10 years there will be a big investment globally in healthcare.”

Consumer staples, Dragicevich adds, are also likely to perform well.

“When you’re getting hit hard by cost of living pressures and rising interest rates, you can’t give up the essentials,” he argues.

“Places like Woolies and Coles tend to do well in this kind of inflation environment.” “Everybody still has to eat. What you tend to do to make room for that in the budget is to give up spending on discretionary items.”

Not only does he believe people will start foregoing discretionary items due to budget constraints, but also due to having overspent during the pandemic.

“Think back to when Covid first hit. What did everyone rush to do? We upgraded our home office, we might have bought a new TV, electronic gadgets for parents and kids to get through lockdown,” he says, “In short, we overspent and overstocked in a lot of those areas.”

Originally published as Why now is a good time for Aussies to invest