Could Australian investors benefit from rising interest rates?

Tuesday, October 18 2016

Leading Australian equities manager, DNR Capital, gives some insight into the share market’s current volatility and where it sees opportunity to benefit from rising interest rates in its latest investment report.

DNR Capital Chief Investment Officer, Jamie Nicol notes that “bond rates have been a little erratic over the past month. They have been reacting to expectations of  a US rate rise and responding to comments from various Federal Reserve officials.”

The IMF is expecting global growth to be around 3.3% although the developed market is more subdued.  Global growth generally remains reasonably difficult.  Nonetheless Nicol believes we have seen a bottom in bond yields noting global interest rates are at multi year lows.

“Bond markets have become crowded.  Years of lower rates have caused significant flow of funds into bond markets and into bond proxies” he added.

“Leading indicators are on the rise.  US personal consumption is rising by 2.9%, Fed models are suggesting circa 3% growth and commodity prices are up. The risk is that neglecting to raise rates now could force the Fed to tighten too quickly in the future.”

Nicol sees low bond yields causing bubbles in the valuation of assets such as commercial real estate and infrastructure which may cause instability in the future.

He points out that “low interest rates have lifted asset prices and companies have tended to return cash to shareholders via dividends and buy backs rather than reinvest the capital. This has exacerbated the gap between rich and poor and is arguably contributing to the current political climate where extremists are gaining traction, populist/socialists on the left and populists/anti-trade on the right.”

Nicol believes governments will need to stimulate reinvestment to drive inflation to ease debt pressures and provide jobs.   This is leading to more aggressive fiscal stimulus programs from governments such as Japan and reduces the case to continue the monetary stimulus which has driven this scenario.

The market has started to anticipate an increase in interest rates, Nicol said.  “The fear is that investors have become very complacent about the impact of inflation and the implications for asset allocation.  We have seen low interest rates drive asset prices”, he added.

Within equities we have begun to see a rotation leadership from defensive yielding companies towards laggards such as financials and resources. “This provides an opportunity to benefit from higher interest rates and we believe our portfolios are well placed to outperform in such a scenario.”



About DNR Capital

Founded in 2001, DNR Capital is an independent Australian investment management company that delivers client-focused, quality, investment solutions to institutions, advisers and individual investors.  DNR Capital is a signatory to the Principles for Responsible Investment (PRI).


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IMPORTANT NOTE: The information relating to DNR Capital has been prepared by DNR Capital Pty Ltd, AFS Representative – 294844 of DNR AFSL Pty Ltd ABN 39 118 946 400, AFSL 301658. Whilst DNR Capital has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and you must make your own enquiries concerning the accuracy of the information within. The information in this document has been prepared for general purposes and does not take into account your particular investment objectives, financial situation or needs, nor does it constitute investment advice. Before making any financial investment decisions you should obtain legal and taxation advice appropriate to your particular needs. DNR Capital will not be responsible or liable to anyone who acts or relies upon anything contained in, or omitted from, this document. Past performance is not indicative of future performance.


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