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  • 12 November 2019

Over recent months, many clients have asked me what they should be doing with their investments or businesses as we continue to travel through unchartered waters.

Interest rates have never been this low in Australia and with talk of negative rates – this is indeed unchartered waters.

We all thought that high property prices could not be sustained. The first assumption, and a view that I shared, was that interest rates were on the rise and property prices would fall and stay flat for some time. After a relatively ‘short correction’ in property prices, we are already seeing them on the rise again in the eastern states of Australia. I must admit, to have an advertised home loan rate of around 4% is a rate I never thought was possible.

The biggest impact of low-interest rates has been on individuals who rely on interest earned from their investments as their only source of income. In my opinion, this is having a far greater effect on our economy than property prices. When people are reluctant to spend money it may not just be because they are risk-averse however the real answer may lie in the fact that they simply do not have any excess funds over their basic living costs. The same issues apply to businesses. 

Low-interest rates should be a chance for businesses to refinance or expand their operations. For example, imagine borrowing at a rate of 5-6% after previously borrowing at more than 10%! Alternatively, imagine borrowing at a rate of 5-6% and generating a net profit after tax of, say, 11%. It should be happy days, but why isn’t it?

Recently, I was trying to understand the success of the business Afterpay. Buy a good today, such as a pair of shoes, and make four payments every two weeks following your purchase. If you pay your instalments on time then there are no fees charged. Sounds good but how does Afterpay make money? 

From what I have read, the fees charged for paying late are around $10. On a relatively small dollar purchase, a late fee of $10 would equate to a rate of interest on your purchase of 15% or more. Moreover, with such high consumer demand to use this form of payment, suppliers are also paying Afterpay to join their service. In Afterpay’s 2019 Financial Report they received more income from suppliers than consumers. It is a smart business model; income from two sources, the supplier and the consumer. Also, imagine the consumer data Afterpay can extract to improve their own business.

Advertised as ‘Shop now. Pay Later’, it appears that people use Afterpay as they don’t have the money to purchase items. I worry that this normalises debt and may lead to further financial problems if not careful. Irrespective, with the share price now around $30 per share, if you had acquired shares at its listing price of $1 each, you would be smiling today. In anyone’s language, that is an outstanding investment. Is it selling goods? No. It is listed as an Information Technology company. It also provides a financial service that customers are using instead of credit cards, so maybe it is a finance company?

This is the business of the future and not a business of yesteryear. A business that understands their market and also understands what their customers want and when they want it. 

As I said, we are in unchartered waters but it does not mean we should stay still while we try to navigate through. 

The dislike of banks has fueled the success of Afterpay and similar businesses. It has opened up the chance to capture the market of Millennials and Generation Z consumers who will have the greatest spending capabilities in the years ahead.

As business owners, we need to be aware of changes in consumer patterns so that we keep up with the market and aren’t left behind. There is no point in borrowing money if you are going to be doing the same thing as you did 10 years ago. The same could apply to investing. You can earn 2% on a term deposit or look for the next Afterpay. 

By the way, did I mention that Afterpay has been making losses yet their share price is still increasing? 

I think you will all agree that we are most certainly in unchartered waters!

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