Keating recommends yield and bonds in 2006

Bonds and high yielding investments will be the place to be by the end of the decade, according to former Prime Minister Paul Keating, who warned investors that the “great bull market of 1992 will finish in 2008”.

“So I would most definitely be looking for yield and bonds come 2006, 2007 and 2008,” he told an ING investment briefing in Sydney yesterday.

But equities markets will flourish for a few years yet, or another 12 months at least, Keating said, who as Federal Treasurer delivered eight budgets and in May 1986 triggered a massive fall in the value of the Australian dollar when he told radio commentator John Laws that Australia could end up a “banana republic” if growth didn’t slow.

At yesterday’s briefing, Keating said we are in the second, infrastructure-driven half of an economic cycle conceived firstly by technological innovation that came about in the early 1990s, and secondly by a resultant spike in infrastructure growth triggered after the tech crash earlier this decade.

“We’re now in the second half of the investment cycle and the second half usually produces much stronger growth,” he said.

But by the end of the decade, when “we’re going to see demographics have a huge impact”, the party will be over, according to Keating.

By then most of the baby boomers will be at least be 65 and resultant labour shortages will slow the economy. Added to this will be structural increases in inflation not helped by increasing oil prices.

“I don’t think you need a crystal ball to see the central banks tightening things by 2009,” he said.

Despite the deleterious effects of Australia’s, and the rest of the western world’s, aging population problem, Keating was confident that China would continue to fuel the world economy thanks to its large domestic purchasing power potential.

However, he added, China would only reach its full economic potential if its dependence on exporting goods is replaced by an increase in domestic consumption.

And domestic consumption in China can only be encouraged by moves by the Chinese government to stimulate spending, Keating said.

“Because they don’t have much social security or health care services, they keep saving their money in banks.”

Policy decisions by the US government will also play a part in the global macro environment by the end of the decade, with the Bush administration’s plans to introduce more tax cuts doing little to reduce its gargantuan twin deficits, according to Keating.

Nevertheless, the massive current account and government budget deficits in the US are unlikely to have a calamitous effect on the world economy, he said.

“If the exchange rate in China moves up over time and depreciation of the US dollar slows, there will be a diminishment of exports coming out of China and the problem will gradually sort itself out.”