After 10 years the Tide is Turning

Rising US interest rates, Falling $AUD. What does it mean for my super fund and investment portfolio?

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 share prices.
  • 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 prices.
  • 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 pulled in.
  • 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 roundabouts.

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:-

  • Maintaining a well-diversified exposure.
  • Favouring defensive over cyclical market sectors.
  • Investing in investment grade credit quality, with an average A rating.
  • Higher levels of shorter dated bonds. These are less impacted by rising interest rates.
  • High 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 Financial

Date posted: 2018-06-15 | posted by: condell

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