The ASX share market is a great place to invest in over the long term because of its ability to grow our wealth over time.
Businesses have a strong desire to grow profit, and they often have incentives in place for management to do a good job. Rising profits are a strong tailwind for potential capital gains for shareholders.
We can't know what share prices will do, particularly in the short term. But if a business offers a product or service that customers want, then there's a good chance that success can occur if that business keeps investing for growth.
Making investment returns is easier when the overall share market is going upwards. It doesn't always go up, of course. But, it regularly goes through periods of gains over time, which investors call bull markets.
Are we about to enter another bull market?
I believe one of the most useful supports for sending share prices higher is interest rate cuts.
The US Federal Reserve recently cut the US interest rate by 50 basis points (0.50%).
According to reporting by CNBC, the Federal Reserve Committee – the group that decides the interest rate movements – has indicated it's expecting 50 basis points (0.50%) of more cuts by the end of the year, another 100 basis points (1.00%) of cuts through 2025 and then 50 basis points (0.50%) in 2026.
Interest rate cuts do not guarantee investment returns, but they can help.
Explaining the importance of interest rates, legendary Berkshire Hathaway investor Warren Buffett said:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
I think falling interest rates will help increase economic activity in the US (and Australia, when the RBA cuts), which could boost companies' profits across many parts of the economy. Plus, the lower rates may encourage investors to pay a higher price for earnings.
2 ASX shares I'm optimistic about
In an environment of rising share prices, I think quality funds management businesses are exciting options.
When share prices rise, it naturally boosts a fund manager's funds under management (FUM), which boosts revenue and profit. Fund managers are very scalable businesses – it doesn't take 10% more people or 10% more office space to manage 10% more FUM.
Also, a falling interest rate environment and rising share prices could encourage investors to give fund managers more FUM to manage.
With that in mind, I like the look of ASX shares GQG Partners Inc (ASX: GQG) and Pinnacle Investment Management Group Ltd (ASX: PNI). While they have already gained significantly over the past year, I believe the strong performance of the underlying funds will help attract and grow FUM during this current rate-cutting cycle over the next two years.
