Where to Invest Once Interest Rates Start Going down? (2025-2030?)

James Tabby on 20/08/2024 - 15:59

This time it is not as clear as the last boom-bust cycle because China is slowing and is basically on the brink of collapse with many people being made to repay their government salaries (are you shocked?). The Australian economy is vulnerable with the mining sector being in a precarious position which has been noted by the RBA.

Australian Housing seems quite bubblish compared to previous cycles but risks remain as a lot of low cost steel is being dumped from China and if the Ukraine conflict ends there could be additional shocks as Russian wooden engineering beams could come flooding the market.

Ultimately, there are concerns that apartment prices could collapse significantly as temporary migrants disappear and construction costs come down sharply. My preference is to avoid further investment in housing unless you are doing property development, but what are your insights?

Which sectors are best suited for investing in light of the current upcoming conditions? Of course leaving it in the bank at 2% rates is not acceptable if ANZ's actions hint where the bottom will be. Let's assume we have a reasonable amount to invest such as $800k to cover a broad range of strategies and a 5 year time horizon before the next possible round of interest rate hikes.

Since 2030 is coming up, are there any other unusual investments that could pay off, i.e. sustainable investments?

I am skeptical of whether Australia can come out of this next crash unscathed, and the next one might be so severe that it will put the US recession to a shame because of our excessive dependence on China. China is building more coal power stations, but they are burning less coal, with even less coal consumption to follow as more manufacturing is leaving the country. That production is being moved to more renewable friendly countries in south/south east Asia and the whole region is building out their renewables infrastructure collectively at a faster rate than China by itself could. This is because of the larger amount of space available across the Asian continent which means more solar/wind projects overall as every country in Asia joined onto the 2030 Agenda. Many other countries like Vietnam have pledged not to build additional coal plants after 2030.

This is good for the environment. But…

Ultimately that is a problem for the Australian economy with the climate goals of 2030 edging closer and closer.

Where are you considering investing for the next 5 years?

It is no good to see a pump in mining stock prices for 2-3 years for it to all come crashing down as we approach the year 2030. Maybe that is what will happen. I don't know.

Financial

Comments

  • Hybroid on 20/08/2024 - 16:02
    +20

    The best time to buy property is always 5-20 years ago. The second best time is today.

    • DingoBilly on 20/08/2024 - 16:51
      +1

      Well unless it crashes in which case it's better to buy after the crash. But as others point out, it's impossible to tell what will happen. It is impossible for housing prices to go up infinitely though so at some point they must go down.

      • Hybroid on 20/08/2024 - 17:15
        +12

        House prices do go up infinitely. In fact they double every ~10-15 years. There may be temporary dips in specific markets and periods, but they always go up, up and up.

        • cloudy on 20/08/2024 - 22:36
          +5

          but they always go up, up and up.

          Found the RE agent…?

          • Hybroid on 20/08/2024 - 22:44
            +5

            @cloudy: Nope. The complete other side of the fence. Been trying to purchase a property for years now… It's not been easy nor fun.

          • Some Human on 21/08/2024 - 00:04
            +4

            @cloudy: Found the REalist

            Ftfy

        • DingoBilly on 21/08/2024 - 09:10
          +1

          I always hate this view as it's just logically incorrect.

          Nothing can go up infinitely. Even if it's the heat death of the universe causing the stop, it has to stop eventually.

          But disregarding that - we don't know if it will go up and up forever. It's pretty trivial for government to implement changes that would effectively kill the market. As to whether they do or not is another matter though.

          • Hybroid on 21/08/2024 - 10:19
            +3

            @DingoBilly: There is no reality where house prices in 2030 are lower than today. Thinking otherwise is kidding yourself and ignoring all of history.

            • Poor Ass on 21/08/2024 - 13:12
              +1

              @Hybroid: not in Australia anyway

            • JakeyJooJoo on 21/08/2024 - 14:57

              @Hybroid: I think it's silly to make such strong assumptions. We are blinded by our recent history in Australia. Look over the ditch out how other countries faired in 2008. Iceland, Ireland, US. Their housing prices all got rickety wrecked in the GFC. Just because ours didn't then, doesn't mean it won't this time, for some of the reasons OP outlined.

              I'd agree with a sentiment of "There is no reality where house prices in 2045 are lower than today."
              But, as for 2030, time will tell. I think it's a bit more likely than not that house prices will be higher in general. And I think it's a bit more likely than not, that apartment prices will be lower in general.

              A good post, it's smart to be diversifying your investments at the moment.

          • JIMB0 on 21/08/2024 - 11:28
            +2

            @DingoBilly: It's more a case of the value of money going down rather than the value of houses going up. Combined with interest rates always being lower than inflation makes it pretty much guaranteed that houses prices will continue to rise. This also applies to other assets such as shares.

        • AaronRain on 21/08/2024 - 13:17

          This is realistic and if you look at it from an interest point of view this is really just around 7% pa (the rule of 72), the reason people make a lot of money from it is because it's easy to sink a large of amount of money into it as it is considered relatively safe.

      • Sinnerator on 21/08/2024 - 08:47

        they will just cram more and more families into a single family home, which is whats happening

  • coffeeinmyveins on 20/08/2024 - 16:07
    +12

    let me consult the ozbargain crystal ball

  • JIMB0 on 20/08/2024 - 16:11
    +6

    A house to live in is a good investment. If our interest rates go down relative to other countries the dollar will drop. Then you'll see property go up in value as it's cheaper for international people to buy. After that an unhedged index fund of overseas stocks.

    • derrida derider on 21/08/2024 - 14:54

      Porque no los dos? Putting your money in Australian assets but offsetting it with unhedged money in a foreign asset is a good way to lay off your bet - if Oz does well relative to foreigners then your Australian asset will do well, if we do poorly relative to them your loss is offset by the falling value of the Aussie.

      Its part of the economists' argument that the optimal tradeoff between risk and reward comes from a portfolio spread amongst assets with low or (better) negative cross-correlation between them (ie they don't go up and down together much).

  • Jimothy Wongingtons on 20/08/2024 - 16:13
    +5

    Maybe that is what will happen. I don't know.

    You had me till the end, op.

    Also im waiting for that lego investment guy to chime in with their expert opinion on which sets to ape out on.

  • Drakesy on 20/08/2024 - 16:23
    +8

    I don't think the rates are going to drop as much as we think. They're lower than much of the rest of the western world and our economy isn't cooling as quickly as intended.

    There's a lot of money out there with those that bought a house for a pittance and paid it off within 15 years.

    • pharkurnell on 20/08/2024 - 17:23
      +2

      High interest rates hurt those with little money and those struggling….

      Those with lots of cash will continue to spend and live it up…

      • Drakesy on 20/08/2024 - 17:53
        +2

        Good time to be a boomer.

        If only i started investing in property when i was 8

        • pharkurnell on 20/08/2024 - 20:09

          yea things appeared easier 50yrs ago

          • donga100 on 20/08/2024 - 23:30
            -2

            @pharkurnell:

            Rates exceeded 10% for the first time in 1974 and pretty much remained above 10% until 1995. In just 4 years, interest rates dropped from the high of 17% (January 1990) to the low of 8.75% (June 1994).

            Source

            • Boioioioi on 21/08/2024 - 08:32
              +1

              @donga100: Rates alone are irrelevant, it is the rate multiplied by the overall price which matters. 17% of $100k is 17k. 6% of $1m is $60k.

  • Ghost47 on 20/08/2024 - 16:34

    The only thing people need to invest in, especially in Australia, is property.

  • Dollar General on 20/08/2024 - 16:54
    +7

    A high yielding BMW

    • Sinnerator on 21/08/2024 - 08:47
      +4

      you can sleep in your car but you can't drive your house around

    • Poor Ass on 21/08/2024 - 13:13

      I thought it was a high yielding Merc

  • BoltThrower on 20/08/2024 - 16:55

    Outside of real-estate?
    You have an interest in renewable energy, what's the next technological advancement in batteries after Lithium-ion? Perhaps there's opportunities there in the mining sector or in the battery production itself.

  • mskeggs on 20/08/2024 - 17:10
    +14

    I love these speculations as if people have the faintest clue.
    Come back in 2030 and tell us how much was correct.

    In 2012 it was an absolute certainty to everyone that interest rates would have to rise sharply to counter the recent massive debt expansion that would drive inflation. Oops, a decade plus of all time lows.

    The assurance that China will crash, as if the leaders will sit idly by and have no reaction.

    This is Facebook uncle level analysis.

    • CrowReally on 20/08/2024 - 17:37
      +2

      I'd almost agree with what you said, but straight out the gates OP used the phrase "boom-bust cycle" which confirms it's an easily measurable and quantifiable pattern.

      We're just waiting for the next part of the cycle, it's simples!

      • James Tabby on 21/08/2024 - 07:53

        It is measurable to some extent, but it isn't perfect as some types of investments can appear to keep going up regardless of the cycle.

        I am just waiting for that next part of the interest rate cycle to take effect, and to have an idea beforehand of where the funds will flow from lower interest rates.

        I doubt people are still going to leave their money at 2% in the bank. That is the effect I'm trying to predict. Ultimately that money has to go somewhere even with the uncertainties in the economy.

        • CrowReally on 21/08/2024 - 09:18

          It is measurable to some extent, but it isn't perfect as some types of investments can appear to keep going up regardless of the cycle

          Can appear to keep going up? What, an optical illusion that makes that investment's line look like it's going up, but it's actually not?

          Or is it the fact that the "cycle" is just a comment on a general trend and it's not a reliable way of picking any particular investment to gauge its direction?

          I doubt people are still going to leave their money at 2% in the bank. That is the effect I'm trying to predict

          If you're so keen on charts and cycles, why don't you just look up what people did with their money the last time interest rates were 2% and copy that. It's a cycle after all, why would it be any different?

    • James Tabby on 21/08/2024 - 07:49
      -1

      They have set idly by because they cannot take on any more debt. They cannot intervene and will ultimately have a lost decade like Japan did.

      The only tool China really has is to start monetising their own debt, e.g. Abenomics, to prevent deflation but it is unclear what they want to do because they also have the USD-CNY peg that they want to maintain. They are taking a different approach.

      • mskeggs on 21/08/2024 - 09:38

        It must be wonderful to have such a clear view of the future, and certainty about what will happen. Best of luck.

    • BigBirdy on 21/08/2024 - 09:11
      -1

      The assurance that China will crash, as if the leaders will sit idly by and have no reaction.

      The only tool China really has is to start monetising their own debt

      War?

      • mskeggs on 21/08/2024 - 09:39

        Can't possibly happen, it isn't one of the scenarios OP has planned out.

  • Nugs on 20/08/2024 - 17:38
    +3

    bitcoin, to the moon….;/
    .

  • Trying2SaveABuck on 20/08/2024 - 19:24
    +4

    IVV
    QUAL/QHAL
    VGS

    Any of the above and sleep easy

  • RobBoss on 20/08/2024 - 20:27

    Throw your money in blue chip stocks and wait 20 years

  • screensaver on 21/08/2024 - 00:06
    -1

    Definately property, not an apartment or anything with strata, it doesnt have to be a free standing house. There are townhouse type things. one to live in and one to rent out, or a house with a granny flat type deal

  • p1 ama on 21/08/2024 - 00:28

    Timing the market is a fool's game, overwhelming evidence suggests that, in the long run, active investing (i.e. timing the market, or picking individual investments) does not generate alpha (above market risk-adjusted returns). Everyone who actively invests are either (i) trying to find different diversified streams (e.g. hedge funds, alternatives) which are uncorrelated to traditional assets, (ii) market making or providing liquidity to markets, or (iii) investing based on a thesis or mandate (e.g. a values-driven superannuation fund). There are limited cases of funds which have "beaten the market" over the long run, but this is a broader discussion that has nothing to do with small-scale individual investing.

    Anybody who is trying to sell you investment tips is scamming you, anybody giving you macroeconomic analysis of investment returns is either doing ex-post analysis, or are forecasting things which are already baked into market expectations.

    Investment is not a "one-off" decision, you should not invest lump sums. If you want to invest your savings, you need to decide what percentage of your income you want to invest, then invest in a recurring manner over time as to average your buy-in (i.e. "dollar cost averaging"). The percentage of your income you invest should depend on your risk profile. Then you should invest in a diversified portfolio of various ETFs, good ones to start with are ones which track the ASX200 index and S&P500. You can then start to look at a NASDAQ or emerging markets fund once you have more capital / comfort around investing.

    FWIW, you might want to get your analysis / facts right as well - not sure why you are talking about thermal coal for electricity in Asia and the Australian mining industry. What China / SEA decides to burn in their coal generators for electricity is irrelevant because most of Australia's major miners no longer mine and export thermal coal. They are mostly mining iron ore, precious metals (particularly copper and nickel), and metallurgical coal, which is used in the production of steel, not electricity.

    • James Tabby on 21/08/2024 - 07:57

      Interesting, but it is possible China must have been burning steel production coking coal for electricity due to supply constraints whilst it was growing. That seems to have stopped now.

      China has been importing less coal from Australia overall, so that trend is still there.

      Anything else explain it?

      Sure Australia exports other types of minerals but those are also exposed, notably iron ore because of the glut of housing in China, recycling of copper as countries move to fibre, and others. Nickel is the only winner as we start to see cheaper battery technology. There is also bauxite, aluminum but I cannot see any pros and cons in the future for it.

      • mskeggs on 21/08/2024 - 09:48

        Who is the largest thermal coal producer in the world? How confident are you in their figures?

      • p1 ama on 21/08/2024 - 14:38

        China has been importing less coal from Australia overall, so that trend is still there.

        Are you talking about thermal coal or met coal? Very different assets.

        Sure Australia exports other types of minerals but those are also exposed, notably iron ore because of the glut of housing in China, recycling of copper as countries move to fibre, and others. Nickel is the only winner as we start to see cheaper battery technology. There is also bauxite, aluminum but I cannot see any pros and cons in the future for it.

        Sure, but what makes you think that you can see these things but the broader market can't and haven't been able to factor into forward expectations?

  • ForkSnorter on 21/08/2024 - 07:41
    -2

    If I had $800k, I would spend it renovating my current house into my dream house. Or I would sell my current house and use the extra cash to buy my dream house and continue to improve it. Beautiful houses are worth investing in and working on, and it is very rewarding to turn an ordinary house into a beautiful one. Not really interested in just using money to make more money. What a boring thing to do. Only got one life. Want to create things, not just suck money out of the economy.

  • Lurk Hartog on 21/08/2024 - 08:57

    VDHG and chill

  • Hedgehog on 21/08/2024 - 09:08

    Bonds

  • BigBirdy on 21/08/2024 - 09:22
    +1

    Based on your analysis …

    • Exit Australian property
    • Short sell Australian mining
    • Short sell Australian hardwood
    • Invest in renewable suppliers (solar panels, etc)
    • Invest in non-China Asian markets
    • mskeggs on 21/08/2024 - 09:46

      And what a successful strategy that would have been in the past few years when all the macro stuff was equally true…

  • cashless on 21/08/2024 - 10:11
    +2

    Gold!
    Oops, that was last week.

  • ozBFM on 21/08/2024 - 12:49
    +2

    Data consistently shows US equity indexes outperform everything else over a long period.

    Property in Australia is all leveraged bets and as supply and tax reforms happen, it will platue.

    30 year returns:

    over three decades:

    7x, if invested in US shares
    5x, if invested in Australian shares
    5x, if invested in International shares
    4x, if invested in Australian listed property; and
    1x, if invested in Australian bonds.

  • Poor Ass on 21/08/2024 - 13:33

    Where are you considering investing for the next 5 years?

    a bit of everything

    Tiny bit of Bitcoin the one true coin that all other shitcoins follow… If it goes to nothing that's fine as it won't be your life savings

    US shares if you are after growth probably NDQ or IVV… in the history of the stock market it has never gone down in the long term. NDQ 100 if some companies go bust they will be replaced. IVV or S&P 500 always safe bet in the long run. Buffet's choice for anyone that don't understand the markets. Majority of financial advisers can't even beat this index group. 6x in price today since 2008 levels. Or FANG ETF if you got the risk appetite (Tesla, Facebook, Apple, Netflix, Amazon, Nvidia, Google, Microsoft all in one share) a good chunk of the US market, you all heard of these brands and unlikely they will go broke.

    AUS shares if you are are after dividends and income.. quality AUS shares are safe but pretty boring and flat lined. Only 1000 more on the ASX200 now compare to 2007 levels. To me I would say it hasn't moved much so this is why US S&P 500 is more attractive.

    Property if you had the money another long term safe bet that never has lost value in the long run. Chuck it in a self managed superfund if you don't need the money until you retire and pay no tax when selling it

    Previous metals are ok too but storage and itself being pretty boring might not be for everyone

  • morebunnings on 21/08/2024 - 14:24

    I think inflation is going to stay high for the next couple years, so buy some index funds that do well in inflation.

    I bought some QUAL a little while back as they are considered to do well through inflation. QUAL is up 21% over the last 12 months. Better than my VAS @ 12% and VGS @ 16% over the same period. Their dividends are 1-2% higher though.

  • tessel on 21/08/2024 - 15:06

    Real estate. Not going down until WW3.

  • lonewolf on 21/08/2024 - 15:40
    -1

    I hope one day property is not thought of as investment and more of as someone's home and people invest in other areas.

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