This note looks at the implications of an upturn in the interest rate cycle for investors.
The key points are as follows:
– With the economic emergency which followed the global financial crisis now fading into history, interest rates will soon start to rise, with Australia likely to lead the way.
– While rising rates may cause periodic jitters in share markets and slow down their pace of advance, they won’t be a major problem for shares until rates reach onerous levels. This is unlikely to be for several years given lingering economic uncertainties, massive excess capacity globally and low inflationary pressures.
– The key interest rate to watch is the US federal funds rate which is likely to take longer to start rising.
– A rising interest rate differential in Australia’s favour will accentuate upward pressure on the Australian dollar, with another chance at parity likley in the next 12 to 18 months.