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What do rising interest rates mean for your investments?

September 13, 2016 By Rob Gilmour

Talk in Australia is still how much lower will interest rates go, but in the US things are very different!  The talk on Wall Street is about the likelihood of another increase the US Federal Reserve funds rate as soon as September.  This makes perfect sense given the continued underlying strength in the US jobs market with an economy moving towards full employment – the Fed will need to start to apply the brakes soon.

This new interest rate fear comes at a fragile time as the US markets hit new highs. The central concern is that interest rates have bottomed and the fear is that the market comes to terms with the fact that central bank support for the markets has peaked. That would change a lot of themes such as:

  • Interest rates rise.
  • The US dollar rallies.
  • The Australian dollar falls.
  • Bonds fall – global bond yields rise with interest rates.
  • The RBA won’t feel the need to cut rates again.
  • Commodity prices fall as the US dollar rises.
  • The property market would wobble as highly indebted buyers think again.
  • Safe income stocks (infrastructure, utilities, REITs) decline as they are priced for interest rates to stay lower forever.
  • Australian companies with US earnings will do well with a weak Australian dollar.
  • Gold will struggle – as the opportunity cost of holding it increases.
  • Companies with high levels of debt would see earnings downgraded.
  • Term deposit and mortgage rates eventually go up – good for self funded retirees, bad for indebted homeowners.

One always needs to be vigilant when there are ideas that the world has changed and we are in a new normal – ultra low or negative interest rates are not normal, things always come around in cycles!

Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.

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