Many ASX retail investors won't recall what it's like to invest in an era of rising interest rates.
Indeed, since 2011, when the RBA's official cash rate still hovered above 4%, there's been only one direction for rates.
Down.
But at today's rock bottom 0.10%, and with inflation ramping significantly higher for the first time in many years, that direction is about to change.
So how will rising inflation and the accompanying hikes in interest rates impact investors in ASX shares?
For some insight into that question, The Motley Fool turned to Brendan Doggett, country manager at online trading platform, Sharesies AU.
The pandemic saw household savings hit record highs
Noting that it's now "widely accepted" that interest rates are going to go up, Doggett told us:
For homeowners, an increase in the cash rate will mean that interest rates on mortgages rise, alongside everyone experiencing a rise in the cost of everyday living, fuel and household goods – impacting household costs.
However, the good news is that the pandemic saw money habits change. Spending fell, debt was paid off and household savings reached all-time highs, meaning many Australians have a nice buffer sitting in their savings account.
Many also used this time to think about their futures and develop positive habits, including investing — something we have seen on the Sharesies platform.
What does this all mean for ASX retail investors?
"The Australian markets have already factored in an increase in rates this year, so we would not expect to see the market respond with a dramatic adjustment," Doggett said.
However, if interest rates increase unexpectedly fast "we might see a correction in the market".
Addressing the sectors and types of ASX companies that historically have outperformed when rates are higher, Doggett added:
While there are no truly 'safe' shares, in times of higher interest rates markets have historically moved away from growth companies including in the tech sector, and rallied behind value stocks such as banks and other well-established blue chips.
Other sectors that have previously been seen to respond well include energy companies, agriculture and gold.
Doggett also pointed to companies in the agriculture sector as likely to do well amid higher rates. "Food commodities will always be essential, regardless of whether inflation is rising or falling," he said.
Looking ahead, Doggett said, "We expect to see continued volatility in the markets in the year ahead. Investors with a low-risk appetite might like to consider investing in ETFs [exchange-traded funds] which follow the index and spread risk across a number of companies."
