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. 

Why investors are firmly focused on interest rates

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™

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”).
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Authorised Representative 298494
Interprac Financial Planning Pty Ltd 

Darryl Jopling

Senior Adviser

I have worked in the financial services industry since 1982 and as a Financial Adviser since 1999.

I have worked for large Financial Planning businesses, Membership based organisations and looked after the financial planning needs of clients within an Accounting Practice before starting my own business.

I am married, have 4 older children and a grandson and I am keen golfer with mixed results like many .

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I have been through the journey of seeing my parents move into Aged care and negotiated the difficulties and pitfalls of understanding the system for them and this gives me an excellent insight into what is required to assist families at this difficult time.

In a previous roll I used to run retirement seminars looking at Centrelink and Retirement Incomes and how to make these work for you. I have helped many of my clients with Aged Care advice when their parents needed to move into Nursing Homes. For many clients I assist them with superannuation, building wealth and protecting their loved ones with insurance.

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I will take the time to listen, explain things clearly and keep you informed throughout the advice process.

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