Investing in an era of rising interest rates will be brand new territory for some ASX investors.
Last week the Reserve Bank of Australia (RBA) bumped the official cash rate from the historic low 0.1% to 0.35%. And multiple more hikes are forecast in the months ahead.
This follows on from moves by the United States Federal Reserve and other leading central banks to increase their nations' interest rates, with most banks hiking rates for the first time in a decade or longer.
Image source: Getty Images
Investing with higher interest rates may require some reallocation
Rates, as you're likely aware, are heading upwards to fend off fast-rising inflation figures.
Australia's most recent consumer price index (CPI) indicated inflation levels of 5.1%. That's well above the RBA's 2% to 3% target range.
Things are even more dire in the US, where the world's biggest economy is enduring inflation of 8.5%. At that rate, inflation will see the cost of living in the US double in just over eight years.
Hence rates are going up and are likely to continue on an upward trajectory at least into next year.
And successfully investing with interest rates forecast to keep climbing requires a different strategy than investing in a year with falling interest rates.
For example, in 2022 as investors have come to grips with the reality of rising rates, the S&P/ASX 200 Index (ASX: XJO) has fallen 6.2%.
Tech shares, often dependent on distant earnings, have fared much worse. This is witnessed by the 31.3% year-to-date decline in the S&P/ASX All Technology Index (ASX: XTX).
ASX financial shares have also lost ground, but less than most of their blue-chip peers. The S&P/ASX 200 Financials (ASX: XFJ) is down 1.1% year to date.
So, what's an investor to do?
Look beyond the noise and do not panic
Adrian Frinsdorf is a director at William Buck Wealth Advisory.
As The Australian reports, Frinsdorf says that investing with higher interest rates offers "both challenges and opportunities", with no real changes to the underlying fundamentals of investing.
According to Frinsdorf:
It's important to remember that wealth can be generated in this new environment. After all, one of the reasons for the rate rise in the first place was the strong performance of the economy.
An objective, patient and well-informed approach focusing on quality assets is the key to long-term wealth creation. It's important that investors look beyond the noise and do not panic.
Of course, higher debt loads will become more costly with the rate hikes. Something to keep a close eye on.
"For those who have borrowed to invest, rising inflation and higher interest rates can have counter impacts," Frinsdorf says. "So it may also be timely to review your debt position and strategy."
In it for the long haul, or time to cut and run
Your investment horizon is another critical factor to consider when looking at investing with higher interest rates ahead.
"Those with a long-term outlook may not feel the need to adjust their portfolio, given that this is a cycle and they are looking 15-20 years ahead," says eToro market analyst Josh Gilbert (quoted by The Australian).
"On the other hand, the assets that investors purchased in 2021 may not have the same outlook now that rates are starting to rise, so now is a great time for investors to reassess their portfolios," Gilbert adds.
Investors may want to revisit shares with strong balance sheets and high profiles, according to Gilbert.
And, as we looked at above, financial shares tend to outperform when interest rates are rising.
"Banks and financials tend to perform well in rate hike cycles, this is because higher interest rates are generally beneficial to banks since they allow them to earn more net interest income," Gilbert says.
