After 10 years the Tide is Turning
Rising US interest rates, Falling $AUD. What does it mean for my super fund and
Interest rates are rising in the US. It is widely regarded that the global
10 year long interest rate cycle is turning. This is a significant time for all
investors but what does it mean for Australian investors?
As this is a complex area we can’t cover all the detail here. In this
article we highlight some key points for consideration.
- Investors chase higher interest rates. Rising
interest rates in the US means a lot of money moving from other places into the
US. That increases demand for the $US and reduces demand for other currencies.
Hence the $US rises against the $A and other currencies.
- Record low interest rates have boosted
sharemarkets across the globe as investors have moved money into shares looking
for higher returns. With rising interest rates investors will move money from
the share market back into the bond market. That puts downward pressure on
- Many companies need to borrow money to
operate. Rising interest rates means a
cost increase for those companies. Companies that have high levels of debt may
actually struggle as interest rates rise. More downward pressure on share
- While we are entering the later stage of the
interest rate cycle the story is different in the different major world
economies. The US is powering ahead with rising wages, strong economic growth
and rising inflation. Recent tax breaks are also stimulating the economy. The
Federal Reserve bank is raising interest rates to put a brake on inflation and
prevent a future blow out. It takes time for a change in interest rates to take
effect. Hence the slow steady trend upwards.
- Europe and Japan do not have sufficient economic
growth to be considering rate rises at this time. China has too much debt and
it is expected that there will be subdued growth from China as debt levels are
- Australia has very little sign of wage growth or
inflation. In fact, we are experiencing a property price pull back. It is not
expected that rates will rise here for at least 12 to 18 months. This means the
interest rate differential between the US and Australia will widen. That means
higher $US to $A. That will be a boost for Australian investors with
international investments. A falling $A will lift the value of international
investments in $A terms. This helps to counter some of the other effects referred to above and highlights the importance of diversity in a portfolio.
It is near impossible to predict with accuracy the timing of market
movements. A quality well-diversified portfolio is the best defence against
changes in investment cycles. Quality finds its true value after the swings and
Interest bearing investments are held in a category of managed funds broadly
classified as Fixed Interest Funds. At this time quality fixed interest funds
will be doing the following things:-
a well-diversified exposure.
defensive over cyclical market sectors.
in investment grade credit quality, with an average A rating.
levels of shorter dated bonds. These are less impacted by rising interest
exposure to senior debt. Senior debt has a higher ranking when it comes to
being paid out.
We continue to monitor the managed
funds and interest bearing securities that we recommend in light of current
market conditions. If you would like to know more about this topic or how we
manage market cycle risk please contact us. Condell
Date posted: 2018-06-15 | posted by: condell