Is it time to invest again?

Rising interest rates are not good for growth investments. As such, it hasn’t been surprising that returns from growth assets have been poor over recent times as interest rates have risen sharply by central banks to try and curb inflation. For a while, it looked like inflation was remaining stubborn in spite of the increased interest rates, and we might have to get used to higher inflation (and thus higher interest rates) for longer.

Recent figures show that inflation is retreating more quickly, prompting speculation that the tightening cycle is coming to an end. Inflation still needs to come down further to be in the 2-3% band that the Reserve Bank of Australia (RBA) is happy with, but recent figures have given cause for optimism that it is indeed getting there. This means that interest rates are nearing, or at, their peak, and central banks may soon pivot and consider cutting rates. That is indeed welcome news for anyone with a mortgage. In the US, inflation also seems to be retreating at a faster pace, thereby increasing speculation of interest rate cuts to help the economy come in for a soft landing.

The prospect of falling interest rates is welcome news for investors seeking growth, but it will come at the expense of returns on fixed-interest assets. Over recent times, many investors have allocated funds away from growth investments into fixed interest to benefit from the higher rates of return on offer while they wait for the inflation dragon to be slain. This has meant some really attractive income returns across various fixed-interest assets, even in the safe haven of term deposits. So, when is the time to switch assets and move from defensive to growth? We aren’t there yet, and there is always the possibility of inflation re-emerging, as the RBA Governor warns us. So, does it pay to be conservative and wait until confirmation is received that inflation is indeed back under control? Perhaps even wait for the first interest rate cut as confirmation?

There is no definitive right or wrong answer. However, we know that the market leads the economy by 6–12 months and will start to factor in scenarios before they actually occur. As such, it is quite normal for growth assets to start reflecting lower rates before those rate cuts are actually delivered. But when? By how much? Which assets? What if they are wrong?

Despite all the speculation and analysis, no one definitively knows. However, if you wait for confirmation of these things, then it is almost certain the market has already factored some of it into prices some time ago. This is why changes to asset allocation need to be managed carefully, as it is extremely difficult to time these things with any accuracy. Often, retaining your asset allocation throughout the cycle is the best option, as it doesn’t depend on trying to time the market. There are still changes you can make within an asset class to help navigate the cycle and protect the downside, but without the risk of being out of the market when it starts to move again.

Working with a financial adviser can help you maintain the right market exposure throughout the cycle while also making sensible changes to your investments to protect you on the downside and smooth your returns over time.