Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

Good news rate rise for investors

AS you get older your perspective as an investor changes.

Take this week’s official interest rate rise. Today the media is naturally focused on how quickly banks will pass the cash rate rise on to mortgage rates and the impact on household budgets.

We now know that Australia weathered the global financial crisis better than any other developed nation and our Reserve Bank is moving to get interest rates back to “normal” levels faster than any other central bank. Indeed yesterday’s rate rise made the front page of the Wall Street Journal website which says much about how remarkable it is in terms of world economic commentary.

The five consecutive rate rises we have just had is the quickest response from the RBA since 1994 so no doubt borrowers – particularly the young and well extended – are beginning to dread the Reserve Bank monthly meetings.

But for older investors with no or low debt and looking for investment growth and income to pay for their retirement the perspective could hardly be more different.

For a start the RBA’s nervousness and motivation in raising rates is because of the resources boom and rising property prices. So our central bankers see more risk that our economy will overheat and potentially have an inflation breakout than they do a double dip recession. The concern is about too much growth, too fast – at least in an Australian context.

If you cast your mind back just to the start of last year that seems like a nice problem to be dealing with – and certainly one every other central banker would happily trade places with.

So rising interest rates at this stage of the cycle ought to be a real positive for investor confidence – both in the fixed interest market and the sharemarket because it sends a clear signal that the RBA is seeing market conditions returning to normal.

High quality defensive fixed interest was the one asset class that stood firm against the global financial crisis storm and in 2008 delivered strong positive returns for investors.

But the focus on rising interest rates raises some interesting questions for fixed interest investors – in particular the shape of the yield curve and whether bond exposure should be shorter or longer term. The GFC did, however, teach some fixed interest investors painful lessons about counterparty risk and the value of liquidity.

So it is perhaps timely to remind ourselves of some evergreen investment principles – and perhaps to be aware of the risks of trying to adopt a narrow or “surgical” bond allocation. Despite the market signals and rate rises suggesting markets are returning to normal there will always be things that are inherently uncertain.

That is the basic argument for more diversification – be it fixed interest or sharemarkets – not less.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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