Sinking interest rates – Considerations for investors relying on income

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Perpetual Private Insights

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The year has been a challenging one in Australia. Having begun 2020 with heartbreaking bushfires tearing across our country, we were allowed no relief as the emergence of coronavirus came to the fore in February.

COVID-19 has presented the world with a health crisis which has, due to the absence of a vaccine, created an economic crisis as a consequence of the lockdown. To put this in perspective, the Deputy Governor of the Reserve Bank of Australia, Guy Debelle, described it as the “largest peacetime economic contraction since the 1930s”.

In response to the economic crisis, monetary authorities (central banks) globally reduced interest rates, in a bid to reduce finance costs for individuals and businesses, as well as to support the prices of financial assets. Through this lens, they have been broadly successful. This is largely the reason that financial markets have regained much of what was lost during February and March this year.

Unfortunately, just as a rising tide lifts all boats, a sinking interest rate drags down all income. So, despite the encouraging progress in softening the impact of the initial shock and now helping facilitate recovery in the economy, it has not been without cost.

Over the past few months, we have seen many companies seek to reduce dividends as a defensive measure to protect themselves through the uncertainty wrought by the pandemic. This has helped drive an acute fall in income distributions across investment markets.

As economies recover, we expect many of the factors that drove income lower, to begin to work in reverse. Inherently, we anticipate income to improve from its current low, into 2021, but not to the levels for 2019. From there, the success of stimulus measures on building a robust recovery, will become the key driver for economic growth, which should further improve income.

In our Quarterly Market Update, we look at the various considerations and challenges that have and will face investment markets through until the end of the year.



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Investing through a crisis

Now more than ever is the time to seek quality financial advice to ensure you plan well through the market crisis. Contact your Perpetual Private adviser or call us on 1800 631 381.

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Perpetual Private advice and services are provided by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. This information was prepared by PTCo and Perpetual Investment Management Limited (PIML) ABN 1800 866 535, AFSL 234426 and is used by PTCo. It contains general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To view the Perpetual Group's Financial Services Guide, please click here. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. The PDS, issued by PIML is available on our website at www.perpetual.com.au/opportunities-funds, should be considered before deciding whether to acquire or hold units in the funds. PTCo do not warrant the accuracy or completeness of any information contributed by a third party. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act. This information, including any assumptions and conclusions is not intended to be a comprehensive statement of relevant practise or law that is often complex and can change. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Past performance is not indicative of future performance.