Falling interest rates change investing landscape

A changing interest environment may mean some tough decisions ahead for investors and advisers.

Tuesday, April 9th 2019, 5:00AM

While it had been expected for some tie that interest rates had dropped as low as they were going to go and would eventually track up again, the Reserve Bank has now indicated cuts ahead.

Westpac says that could happen as soon as next month. That view is shared by ASB and Infometrics, which expect the OCR to hit 1.25% by the end of the year.

Chris Douglas, principal at MyFiduciary, said if interest rates were to fall, it would be good for fixed interest markets, particularly investors who held long-dated bonds.

"It could also be good for property and infrastructure asset classes. As for equities, it’s difficult to say. A drop would signal that global markets are slowing, which shouldn’t be good for those invested in the sharemarket. That being said the recent rally has been driven in part from a more ‘dovish’ stance from the US Federal Reserve. We also know the current long bull run has been fuelled in-part by ultra-low interest rates."

But ASB wealth economist Chris Tennent-Brown said it would just mean the continuation of a challenging period for conservative investors who would previously have been able to rely on term deposits for income.

"For some people the low interest rate environment has been a catalyst to get advice, and set up an investment portfolio or managed fund in order to generate the income they need. It also makes it tough for investors in the bond market, because even corporate bond yields are incredibly low."

There would also be pressure on advice firms, he said.

"Fees and brokerage become even more important as rates come down and the fee as a proportion of the return goes up."

Adviser Jordi Garcia said low interest rates had changed the conversations he had with clients.

"Clients are starting to get a bit concerned with income and given that half of our clients, perhaps more, are close to retirement or in retirement, income is their primary concern."

He said he took a holistic approach with clients, looking at the lifestyles they wanted to achieve and the income needed for that.

He would then work out what sum was needed to maintain that over their lives.

"That takes away the focus on income to focus more on what they need to meet their expenses for the remainder of their lives."

He said he told clients it was likely that the investment returns in future could not be as good as in the past. A lot of asset prices had been pushed up by low interest rates to the point where there was little upside left.

Douglas said a fall was not guaranteed. "While the Reserve Bank have indicated this could be the next move, no one knows what could happen. It's been a very topsy-turvy time lately and I expect this will continue."

Tags: interest rates investment