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Hewison Private Wealth - Insights
Hewison Insights

Investing in a rising interest rate and inflationary environment.

Nathan Lear
Partner & Wealth Adviser
5 Sep 2023

With interest rates increasing sharply over the past 12 months, income returns on fixed income investments are now looking a lot more attractive that they were a year ago.  

Investors have been navigating the complex relationship between interest rates and various investments. When interest rates rise, this can put downward pressure on asset prices like shares and property. Longer dated fixed income investments, such as bonds can also come under pressure as capital flows to newer issue debt providing more attractive interest rates to investors. With interest rates rising sharply over the past 12 months in Australia, arguably a lot of the pain is already priced into asset values.  

Other factors, such as economic conditions, inflation, and global events, can also play a significant role. 

Higher income returns not only extend to savings accounts, but also other types of fixed income investments, such as term deposits, bonds, corporate credit, capital notes and private lending investments such as secured first mortgages. In the current environment, we are seeing very attractive risk adjusted income returns on many fixed income investments. 

Investors may be tempted to focus on higher fixed income investments given the increased returns they are now receiving but while inflation remains elevated it is important to grow your investments portfolios capital base to fight the effects of inflation. 

While the interest rate on your fixed interest investments may be much more attractive than they were a year ago, keep in mind that inflation in Australia is still running at around 6% per annum. Therefore, if you are receiving less than this from a fixed interest investment, then your real return (adjusted for inflation) is negative. 

This highlights the importance of investing in a diversified portfolio which includes not only fixed interest investments, but also growth investments such as shares and property that have the ability to grow and offset the impact of inflation. 

Individual investment strategies should be based on your risk tolerance, financial goals, and time horizon. 

In any case, before making any investment decisions, it’s a good idea to consult with a financial adviser who can take your specific situation into account and provide personal advice.