It would be remiss of us not to start this week’s market update without extending the warmest wishes from the Australian Diamond Portfolio team to our clients and contacts in Victoria.
We can only imagine how difficult the past few months have been, and we hope you are able to enjoy the freedoms you have had to sacrifice these past few months with your friends, family and loved ones.
In this week’s update, we talk about the upcoming Reserve Bank of Australia (RBA) meeting, scheduled to take place next week, and why it will likely end up being a critically important one for Australian investors trying to build and protect wealth in the years ahead.
America decides. The RBA has decided!
By this time next week, the US Presidential Election will have taken place. Whether or not we know who will be President a week from now is far less clear, with betting markets continuing to tighten, and the possibility of a contested election result building by the day.
Whilst the eyes of the world will be on Washington, Australian investors are more likely to be influenced in the years ahead by what happens in Martin Place, Sydney, for next week the RBA will be meeting to adjust current monetary policy settings.
At this stage, the following is expected:
- A 0.15% reduction in the cash rate from 0.25% to 0.10%.
- A 0.15% reduction to their target for 3-year Australian government bond yields and the term funding facility they have in place, bringing these both to down to 0.10% as well.
- An expansion of their quantitative easing (QE) programme so that they can also buy longer term bonds, from 5-10 years maturity.
Whilst it’s not yet known how large the QE programme will be, market expectations are that it will be in vicinity of AUD $150bn, which would be just shy of 10% of the value of Australian economic output in any given year.
We can also expect a policy statement which stresses the ongoing weakness in the global economy and uncertainty regarding the outlook in the years to come, plus assurances that the RBA stands ready to provide “support”.
Support really means ever looser monetary policy, including negative interest rates and more money printing.
The key takeaway is that the RBA has now well and truly decided to enter the global currency war, whereby it tries to push down the value of the AUD in the hope it will stimulate export demand.
It is also opening up the monetary spigots so that it can effectively finance Australian government budget deficits, which have obviously exploded in the aftermath of COVID-19.
These developments are very bullish over the medium to long-run for hard assets, including pink diamonds. After all, the impact will be as follows:
- More and more investors forced or tempted to move money out of the bank given the negative real interest rates they are earning and will continue to earn. This is bullish for pink diamonds given how well they historically perform when real interest rates are low.
- Pressure on bank margins, made worse by the rising stress on their balance sheets given the circa 10% of households with a mortgage who have stopped repaying them due to COVID-19 impacts. Over time this will negatively impact the local share market.
- Rising inflationary concerns, as Federal government debts, which will continue to build, are increasingly paid for/bought by the RBA, which will literally enter a few keystrokes into a computer keyboard in order to create the “money” needed to buy the bonds the Federal government issues to finance its deficit spending.
Make no mistake, the RBA will be well and truly crossing the Rubicon with the decisions it will announce to the market next week.
Those who are concerned about the impact these decisions will have on financial markets and on the economy in the years to come are adjusting their portfolios now, and indeed have been for most of this year.
Part of that adjustment includes allocating investments to hard assets like pink diamonds now, given their strong track record of high performance and the fact they are truly limited in supply.
We are doing the same with a portion of our own wealth.
Product launch coming!
In the next fortnight, Australian Diamond Portfolio is set to launch an exciting new product range. Timed to coincide with the pending closure of the Argyle Diamond Mine in late 2020, this unique product range has been years in the making.
As a valued client of Australian Diamond Portfolio you will be amongst the first people to gain access to these products, which we are tremendously excited to bring to the market.
Watch this space!
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.