The Greek election victory of the anti-austerity Syriza party has increased investor uncertainty by putting further strain on the stability and growth prospects of the euro block.
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Syriza apparently wants Greece to remain in the eurozone but how this can be achieved along with other objectives to renegotiate bailout terms and stimulate the economy remains to be seen.
World foreign exchange markets have already been struggling with Switzerland's decision to remove the cap on the euro transfer value which generated large losses for highly geared currency traders betting on a fall in the Swiss franc. Now the euro especially will come under further pressure until both the demands of Greece are resolved and world financial markets adjust to the European Central Bank's trillion dollar easing program.
Since December, the central banks of Canada, Norway, Denmark, Sweden, India and Switzerland have all reduced their official interest rates. Now our financial markets are not unrealistically expecting the Reserve Bank to reduce the official rate by 0.5 per cent by year end.
The odds are increasing that the first 0.25 per cent reduction may even occur next week in order to reduce the inflow of funds seeking a safe haven. Certainly, if the Reserve Bank is set on seeing the dollar trade in the mid 70 US cent range, lower rates would help achieve this.
While lower interest rates will benefit geared consumers and investors, there's little evidence from overseas experience that they will also increase our growth prospects. Australia is and will continue to be adversely affected by falling commodity prices which is already leading to job losses and lower capital outlays.
So far, our share market has performed well, helped by the attractiveness of yields on offer. As interest rates fall further, even more support is likely from investors restructuring their portfolios to improve returns. Nevertheless, switching to cash investments can be a worthwhile option for super fund and other investors with short or medium term needs to draw upon their investment assets. The advantage of this is locking in good profits that could in a volatile market disappear very quickly as was the case during the GFC.
Similarly, using these profits or current income to reduce debts as quickly as possible is another attractive option. If interest rates remain low, there'll be future opportunities to re-borrow for investments when more appealing ones are available.
There's a consensus of gloom over the prospects of many of the world's largest economies excluding the US and possibly China. In this environment, Australia's investors are unlikely to prosper unless our currency falls even further than the Reserve Bank hopes.
These considerations highlight the current need for caution in risk taking and gearing decisions.
Daryl Dixon is the executive chairman of Dixon Advisory.
