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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 first time this year on 6 February.

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.

Important information and general advice warning

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer of the Vanguard ETFs and the Operator of Vanguard Personal Investor. We have not taken your objectives, financial situation or needs into account when preparing this publication 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 Vanguard ETFs before making any investment decision. Before you make any financial decision regarding Vanguard ETFs , 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 at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD for Vanguard ETFs before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au 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 publication was prepared in good faith and we accept no liability for any errors or omissions.

 

Tony Kaye, Senior Personal Finance Writer
January 2024
vanguard.com.au
 

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Louise Laing

Louise founded Salus Private Wealth to offer high quality personal advice to clients who want to work closely with an adviser for the long term. Her philosophy that understanding each individual and their motivations and needs is key to an enduring and successful financial planning relationship is at the heart of the business.

She first engaged the services of a financial adviser herself when she was in her early 20s (long before becoming one) and believes the non-judgemental support and education about her position and options provided at this early stage has allowed her to make confident decisions in different aspects of life since then.

This confidence and positivity in making choices, financial or not, is what she wants to give to her clients.

Superannuation & Retirement

Superannuation is one of the largest and longest duration investments most people in Australia have, making it a critical part of long-term planning even if retirement feels like a distant objective. For those in the lead into retirement, we design strategies so you have peace of mind that when you start to draw on your retirement savings, you have liquidity and stability to support that.

Legislation and rules are changed regularly, so advice can help you take advantage of opportunities to build for the future. We are authorised to provide advice on and to SMSFs.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

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Protecting your wealth, lifestyle and family is high on the priority list for many clients and this is an area of advice need that can change very quickly. Ensuring you have the cover you need can give peace of mind that what’s important is taken care of in the event of illness, injury and death, but we also make sure over time you are not paying for cover you no longer need.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Estate Planning

While talking about death doesn’t seem like a particularly appealing prospect, it’s a topic we see as a vital part of financial planning. Importantly, it’s a topic for every adult, regardless of their stage in life. Without a proper estate plan assets may not be passed where you’d like them to go, family conflict can ensue, and in the event you lose capacity there may not be an authority in place for the person you would choose to make those decisions for you to do so. While it can be an uncomfortable subject, we are experienced in facilitating these conversations as part of our advice process.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Strategic Debt & Cashflow

Managing debt efficiently can have a material impact on your financial wellbeing and lifestyle. Having a solid plan to understand where your money goes and manage cashflow and debt can eliminate stress and set you on a positive path toward achieving your goals.

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Once we have a clear understanding of what we are aiming for and how you feel about taking on investment risk, we can help direct your funds into appropriate investments to meet your goals. This includes recommending the investment structure, consideration of tax implications, asset types, and putting together a suitable blend for you. You will have transparency of and access to view your investments, providing security.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Aged Care

Aged care needs can arise suddenly. The complexity of managing this can be a significant challenge at a time when your focus should be on the person requiring care. We can assess the alternative funding options to ensure you make an informed choice in the best interests of the person requiring care.

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The Trustee for Laing Weaver Family Trust T/A Salus Private Wealth (Corporate Authorised Representative No. 1305571) and all our advisers are Authorised Representatives of Finchley & Kent Pty Ltd, Australian Financial Services Licence No. 555169, ABN 50 673 291 079, and has its registered office at Level 63, 25 Martin Place, Sydney NSW 2000.

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Disclaimer: The information contained within the website is of a general nature only. Whilst every care has been taken to ensure the accuracy of the material, The Trustee for Laing Weaver Family Trust T/A Salus Private Wealth and Finchley & Kent Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.