Why investors are firmly focused on interest rates

2024 is very much a story of how quickly and how sharply rates will start coming down.

Around the world, just like in 2023, financial markets, investors, and borrowers are firmly focused on what will happen to official interest rates.

But unlike last year, when rates were on the way up, 2024 is very much a story about how quickly and how sharply interest rates will start coming down.

Rising expectations around looming cuts to interest rates – a signal that central banks believe surging inflation levels are being brought back under control – provided a strong tailwind for share markets in December.

The Australian share market, when measured by the S&P/ASX 300, rose more than 7% over the final weeks of 2023. 

Higher for longer

The course of interest rates will remain a firm focus for most investors in 2024.

While the United States’ Federal Reserve Bank has indicated it expects to start cutting interest rates during this year, its December policy meeting minutes shed little light on when that process will begin. This will largely depend on the pace at which inflation levels continue to decline.

The Reserve Bank of Australia is in a similar boat. The RBA board will announce its next decision on interest rates when it meets for the third time this year on 7 May.

Vanguard’s just-released economic and market outlook for 2024 notes that “the persistence of positive real interest rates” will provide a solid foundation for long-term risk-adjusted investment returns over the next decade.

Vanguard forecasts that the spread between global equity and global bond returns is expected to be 0 to 2 percentage points annualised over the next 10 years. As such, we expect return outcomes for diversified investors to be more balanced over the next decade.

For those with an appropriate risk tolerance, a more defensive risk posture may be appropriate given higher expected fixed income returns and an equity market that is yet to fully reflect the implications of the return to sound money.

In the decade ahead, our forecast is for annualised earnings growth of 1.5% for Australian equities and 4.1% for global ex-Australia equities, supported by an expected growth rate in the U.S. that is well below that of past years but still higher than elsewhere.

Our bond return expectations have increased substantially. We now expect Australian bonds to return an annualised 4.3%-5.3% over the next decade, compared with the 1.3%-2.3% 10-year annualised returns we expected before the rate-hiking cycle began.

Similarly, for global bonds, we expect annualised returns of 4.5%–5.5% over the next decade, compared with a forecast of 1.6%-2.6% when policy rates were low or, in some cases, negative.

Diversification remains key

As always, having a diversified portfolio of investments is key because the returns from different asset classes and market segments vary from year to year.

Making tactical adjustments to a portfolio based on what’s happening on investment markets at any point in time, particularly when there’s a high level of turbulence, may seem logical.

Rather than making tactical changes, investors who stay aligned to their goals, who are well diversified, who minimise their costs, and who have the discipline to stay invested, even during periods of heightened volatility, have the best chance of investment success over the long term.

Source: Vanguard January 2024

This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™

GENERAL ADVICE WARNING
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) is the product issuer and operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee and product issuer of Vanguard Super (ABN 27 923 449 966).
The Trustee has contracted with VIA to provide some services for Vanguard Super. Any general advice is provided by VIA. The Trustee and VIA are both wholly owned subsidiaries of The Vanguard Group, Inc (collectively, “Vanguard”).
We have not taken your or your clients’ objectives, financial situation or needs into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for the product before making any investment decision. Before you make any financial decision regarding the product, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained on our website free of charge, which includes a description of who the financial product is appropriate for. You should refer to the TMD of the product before making any investment decisions. You can access our Investor Directed Portfolio Service (IDPS) Guide, Product Disclosure Statements (PDS), Prospectus and TMD at vanguard.com.au and Vanguard Super SaveSmart and TMD at vanguard.com.au/super or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This website was prepared in good faith and we accept no liability for any errors or omissions.
Important Legal Notice – Offer not to persons outside Australia
The PDS, IDPS Guide or Prospectus does not constitute an offer or invitation in any jurisdiction other than in Australia. Applications from outside Australia will not be accepted. For the avoidance of doubt, these products are not intended to be sold to US Persons as defined under Regulation S of the US federal securities laws.
© 2024 Vanguard Investments Australia Ltd. All rights reserved.

Facebook
Twitter
LinkedIn

Latest Posts