BlackRock’s head of fixed income, Steve Miller, has said that the Reserve Bank of Australia (RBA)’s decision to cut rates may mean that income investors need to adopt a changed approach, reported Financial Standard.
RBA’s decision to cut the base rate by 25 basis points to a record low of 2.75% comes amidst rising unemployment, a high Australian dollar and concerns over the performance of the economy.
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Miller said, "In the short-term the cut is positive for the bond market but it does raise concerns about investors’ income seeking strategies in the long-term.
"We could see some more products focused on high dividend equity income strategies and a greater emphasis on global credit portfolios. The cut means investors should also remain sanguine about fixed income investments in Asia and emerging market debt."
State Street Global Advisers head of SPDR ETFs, Amanda Skelly, agreed that investors should now be looking to further diversify their income streams.
"With exchange traded funds, investors can buy a diversified portfolio of shares in a single trade – taking out some of the risk associated with choosing individual stocks," Skelly added.
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By GlobalDataMiller added that falling rates mean it will be increasingly difficult for investors to derive income from government bonds and term deposits, which may mean riskier assets such as investment grade corporate and high -yield bonds will see inflows.
"Government bonds do still play an important diversifying role in any safe harbour portfolio so I would expect institutions such as pension investors to keep their allocations stable.
Perpetual head of investment market research Matthew Sherwood also said that Australian investors should expect further cuts in the future.
"Notwithstanding the solid consumer spending volumes and improved trade performance, growth in household spending is nowhere near enough to fill the $30 billion growth hole in the domestic economy in FY14/15 following the lessening of the mining investment boom," Sherwood said.
