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.

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