Outlook 2020: Income
In 2019, many central banks, such as the US Federal Reserve (Fed), cut interest rates rather than raising them. This low interest rate environment looks set to persist in 2020 with the Schroder Economics Team forecasting one more interest rate cut from the Fed. Income seekers will not be able to rely on cash savings or low risk government bonds to provide the income they want.
Investors’ expectations are over-optimistic
In fact, investors want higher levels of income than any asset class can provide. The Schroders Global Investor Study 2019 found that average expectations of annual investment returns over the next five years now stand at 10.7% – nearly one percentage point higher than at the same time the year before.
These expectations far outstrip the savings rates offered by banks. But even higher risk, and potentially higher return, asset classes like shares don’t offer these kinds of returns. Schroders’ multi-asset team’s latest forecasts for the next ten years show emerging market equities are likely to provide the highest returns – but at 9.0%, this is still below the average return investors say they expect.
The future won’t be the same as the past
Investors and savers around the globe seem to be drawing on their memory of the 1970s, 1980s and 1990s, when interest rates looked very different to now. Double-digit returns for savers have become stuck in our memories. However, they were the exception, not the rule. Across a broader sweep of history, base rates have stayed far closer to where we are today. Returns for savers were correspondingly lower too.
What can income investors do?
It may be unrealistic to expect returns of 10.7% per annum, but it’s still possible to achieve higher returns than those offered by savings accounts or government bonds. Here, I offer three tips for investors seeking sustainable, higher income in 2020 and beyond.
Firstly, educate yourself about the market. Higher returns are available, but they are likely to carry higher levels of risk. It’s important for income seekers to be aware that they are risking capital when investing in asset classes like corporate bonds or shares. Investors need to understand the risks, and how comfortable they are with taking those risks.
A second, related point, is that investing for a short time period is unlikely to bring the best returns. A time frame of at least five years is likely to be needed, particularly when investing in higher risk assets such as shares. This allows time to smooth out the peaks and troughs that are inherent in stock markets.
And thirdly, it’s important to start as soon as possible. This allows your investment to grow through the power of compounding.
Can equity income provide a solution?
Looking more specifically into 2020, the dividend yield on most equity markets appears to be at attractive levels currently. Equity investments may be suitable for those seeking income who are prepared to take extra risk with their capital.
As the chart below shows, current dividend yields look attractive both compared to recent history and, importantly, the alternatives available like cash deposit rates and bond yields. In particular, dividend yield levels are highest in Europe and Asia and at much higher levels than US markets.
Savers may need to consider many more sources of income than in the past, including equities. Dividends contribute a high percentage of the total returns from equity markets in Europe and Asia (the remainder coming from rising prices) so as we look into 2020 this could be a good opportunity to do some research.
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material, including the website, has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.
- Can the UK economy rebound after Brexit?
- How to keep the virus away from your investment portfolio?
- How should you invest in credit in a low-yield environment?
- The $19k cost of trying to time the market
- What 174 years of data tell us about house price affordability in the UK
- Why solar energy’s prospects look bright for 2020