Investment advice when interest rates and inflation are climbing

Surging inflation globally – and the rising interest rates it causes – is impacting investors everywhere. Here’s how to handle it.

Inflation is surging, interest rates are rising in response, and investors everywhere are wondering what it means for their assets.

Paltry returns paid on bank deposits are set to rise, but property prices are tipped to take a hit, and the sharemarket could be shaken in the short-term, economists and analysts say.

Australia’s annual inflation rate of 5.1 per cent is below most countries, but high enough to prompt our Reserve Bank to raise its official interest rate this month – the first rise in 12 years – and flag further rises a until inflation returns to the RBA’s 2-3 per cent target range.

Investors are being urged to understand how they may be impacted, and take action if needed.

The Reserve Bank says home values could drop 15 per cent if interest rates rise 2 per cent, while BetaShares chief economist David Bassanese says stocks and bonds are also under pressure so “cash is king”.

EXPECT WEAKNESS

Investments that have boomed in recent years – such as technology stocks – are among the hardest hit.

“Rising interest rates are unwinding some of that asset price boom across the board,” Bassanese says.

“This is a time you probably do not want to be looking to put too much money to work. Just wait and see how things play out.

“If you have cash on the sidelines I wouldn’t be in any hurry to deploy it.”

Davide Marcotti says his investment approach focus on future events. Picture: Jonathan Ng

DON’T PANIC

There’s no need for knee-jerk reactions because most investors should have a long-term focus.

William Buck Wealth Advisory director Adrian Frinsdorf says higher rates and inflation present “both challenges and opportunities”.

“It’s important to remember that wealth can be generated in this new environment,” he says.

“After all, one of the reasons for the rate rise in the first place was the strong performance of the economy.”

Frinsdorf says the fundamentals to smart investing remain.

“An objective, patient and well-informed approach focusing on quality assets is the key to long-term wealth creation,” he says.

“It’s important that investors look beyond the noise and do not panic.”

INVESTMENT CHECK-UP

Frinsdorf says now is a good time to review your investments.

“For those who have borrowed to invest, rising inflation and higher interest rates can have counter impacts – so it may also be timely to review your debt position and strategy,” he says.

eToro market analyst Josh Gilbert says investors’ goals and time frames will influence their next move.

“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,” he says.

“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.”

SEEK OPPORTUNITIES

Gilbert says history shows that at the start of rate-rise cycles stocks are usually negatively affected, “but they rebound within six months to a year”.

He says investors may look to add quality stocks – with strong balance sheets and high profits – to their portfolios.

“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,” he says.

Bassanese says those not wanting to pick individual stocks can choose exchange traded funds that spread money across an entire inflation-friendly sector such as gold, energy or mining.

eToro investor Davide Marcotti says he protects his investments from rising inflation by rotating money towards stocks and cryptocurrencies.

“While this might be painful in the short term, I expect that it will pay off very generously in the long run,” he says.

“I have been investing taking inflation into consideration for many years, so I had to make very little adjustments to my portfolio. My investment approach is based on what’s going to happen and not what’s happening.”

Adrian Frinsdorf from William Buck’s wealth advisory says investment fundamentals remain.

HOW AUSTRALIA COMPARES

(Current annual consumer price inflation)

Japan 1.2%

China 1.5%

France 4.5%

Australia 5.1%

Canada 6.7%

Britain 7%

India 7.0%

Germany 7.3%

US 8.5%

Greece 8.8%

Spain 9.8%

Brazil 11.3%

Pakistan 12.7%

Argentina 55.1%

Turkey 61.1%

Source: The Economist