The last financial year brought attractive returns for investors. Since then we saw further gains in our super and investment funds in July, followed by weakness in August and September. Does this point to problems ahead?

Future interest rates will be the most influential factor in answering that question. Rates have been pushed up dramatically to bring inflation under control. It had been falling steadily for the last six months but ticked back up again in August, raising concerns.

There is a new Governor in charge at the Reserve Bank. Fortunately she doesn’t have training wheels on, having spent her whole career there. The decision to leave rates unchanged was expected but the new Governor was firm in suggesting rate rises are quite likely in the future.

The September Quarter inflation reading due in late October will be crucial in deciding if rates go up on Melbourne Cup day. Salaries and wages, long quite flat, are rising. Just how fast isn’t known. Sharp increases will mean higher production costs and higher inflation.

We are seeking a soft landing, a controlled slowdown, so demand drops. Maybe, as wages are rising, consumer spending isn’t slowing enough, so demand is keeping prices and inflation high. If so, interest rates will have to go higher.

Banks now offer 3 to 4 per cent interest on call, and up to 5 per cent for 12 month deposits. That’s attractive, though it is fully taxable, without franking credits.

AMP Chief Economists Shane Oliver says when it comes to investing in growth assets the historical track record shows that succumbing too much to pessimism doesn’t pay. He says the history of share and property markets in developed countries has been a triumph of optimists.

Oliver says one dollar invested in cash deposits since 1900 with income reinvested is now worth $250. A dollar invested in government bonds is worth $903, while a dollar invested in average Australian shares is worth $811,079.

We are in a transition period, trying to engineer a benign slowdown, a return to normal without a recession. Some investors may like to move more into cash and wait a while until the future is clearer. 

However Shane Oliver points out that it is extremely difficult to choose exactly when to opt out and go to cash, and when to buy back in to profit from the recovery. Usually people act too late.

Property values are already recovering from their fall last year with Sydney house prices back up 11 per cent. Shares in good quality companies with reliable earnings and dividends are also sought after. When inflation is high asset values usually rise.