Speculation about the timing of interest-rate cuts in Australia has become a staple of media coverage as consumers grapple with rising living costs.
Markets are pricing in four interest-rate cuts here, most likely between February 2025 and August 2025, the ASX RBA Rate Tracker shows.
If it happens, a full percent of rate cuts would save homeowners around $5,000 a year on average mortgages, according to Finder, a comparison site.
In theory, lower rates should also be a tailwind for interest-rate sectors such as listed infrastructure and retail estate investment trusts with long-duration assets and plenty of debt.
As readers know, I believe market expectations for rate cuts in Australia are a little ahead of themselves. Rate cuts are coming, but maybe a bit later than February 2025 for the first cut and not the supersized 50 basis point cut some call for.
Reserve Bank of Australia Governor Michele Bullock has repeatedly stressed that the outlook for inflation and interest rates ‘remains highly uncertain’ and the RBA Board is ‘not ruling anything in or anything out’ with rate cuts. The rhetoric doesn’t sound like the RBA has its finger on the rate-cut trigger, although that might change, depending on economic data.
Granted, the RBA’s long-standing rhetoric on rates sounds like central bank gobbledygook. I’ve long given up relying on central bank forecasts because they are often wrong. Recall the RBA’s 2021 howler that rates would stay low until at least 2024. Relying on central bank macro forecasts is a surefire way to destroy wealth in the long term.
My view that rates will take longer to be cut and come down a little slower than the market expects, is based on persistently higher inflation. Reckless government spending, public-sector pay rises, weak productivity growth … is it any wonder inflation is proving hard to break in Australia?
Although the timing of rate cuts is unclear, two things are certain. First, the direction of rates is heading lower. A rate rise at this point would send the Australian economy into technical recession, so weak is the consumer.
Second, the Australian rate cycle is a long way behind other advanced economies. The United States has already had its first rate cut – a supersized 0.5% cut in September, with another 0.5% in cuts likely in the next few months.
That thinking suggests it’s a reasonable time to increase portfolio exposure to interest-rate-sensitive sectors such as listed infrastructure and REITs.
These sectors typically perform better when rates are cut. They benefit from lower interest costs and yields on income-focused investments, such as infrastructure and listed property, look more attractive relative to bond yields.
Of course, many other factors affect infrastructure and REIT performance, and different sub-sectors within those sectors can perform differently.
But after underperforming global equities for much of the past seven years, there’s more to like about infrastructure and REIT valuations as rates are cut here and overseas in the next 12 months.
My approach is to focus on global infrastructure and REITs principally because the US, United Kingdom and Europe are well ahead of Australia with rate cuts. Offshore infrastructure and property assets will benefit earlier from rate cuts.
Moreover, I currently prefer having hedged currency exposure for overseas investors. I expect the Australian dollar to gradually strengthen in the next 12 months against the Greenback, as our interest rates stay higher for longer compared to the US.
Exchange Traded Funds (ETFs) are a simple way to add global infrastructure and REIT exposure to portfolios. There’s a case that REIT investment requires active rather than index investing, to avoid office and other troubled property sectors.
But office properties tend to have a much lower weighting in global REIT indices compared to Australia, which has relatively limited choice compared to US REITs.
Here are two ETFs in infrastructure and REITs to consider:
- iShares CORE FTSE Global Infrastructure (AUD Hedged) ETF (ASX: GLIN)
The Vanguard Global Infrastructure Index ETF (ASX: VBLD) is usually my go-to ETF for global infrastructure exposure, having featured in this column several times since inception in 2018. VBLD has delivered an annualised 8% return since then – a reasonable return given the impact of the COVID-19 pandemic.
As mentioned earlier, I prefer hedged ETFs for international exposure to reduce currency risks, as offshore rates are cut this year and ours stay the same.
The iShares CORE FTSE Global Infrastructure (AUD Hedged) ETF meets that need. Launched in May 2023, GLIN provides exposure to 133 core infrastructure holdings in global developed markets.
About half of GLIN is invested in utilities assets, giving it a more defensive flavour. Energy assets, toll roads, railroads and airports are a good portfolio foundation for conservative long-term investors. About 60% of GLIN is held in US assets.
GLIN has a year-to-date return of 14.8% to end-September 2024. An average Price Earnings of 19.5 times is okay for assets of this quality, as is a price-to-book ratio of 2.2 times. The trailing yield is 2.3%, making it a better fit for growth investors.
GLIN’s annual management fee of 0.15% appeals for a global sector ETF with inbuilt hedging (which typically adds to fees). The fund won’t shoot the lights out. But with so few infrastructure funds listed on ASX these days, it’s a useful tool for global infrastructure exposure as rates are cut.
Chart 1. iShares CORE FTSE Global Infrastructure (AUD Hedged) ETF
Source: Google Finance
- VanEck FTSE International Property (AUD Hedged) ETF (ASX: REIT)
The aptly named REIT invests in a portfolio of about 320 real estate investment trusts. Almost three-quarters of the REIT is invested in the US – a favoured market for REIT exposure as US rates fall this year and next.
Only 5.6% of REIT is invested in office property, which has struggled after COVID-19 as many people continue to work from home.
REIT provides more exposure to healthcare REITs, data-centre REITs and other niche REITs that have stronger long-term growth prospects,
REIT has rallied over the year to end-September 2024, returning 26%. Over five years, however, REIT’s return is barely positive, suggesting it has a lot of catch-up ahead. US rate cuts could be a catalyst for that long-term underperformance to reverse.
With a trailing dividend yield of almost 5%, REIT may suit long-term investors who seek a mix of income and capital growth from global listed property assets.
REIT’s annual management fee is 0.2% and it pays a distribution four times each year. Like the GLIN infrastructure ETF, REIT is hedged for currency movements.
Chart 2: VanEck FTSE International Property (AUD Hedged) ETF
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 9 October 2024
