Today’s move by the RBA manifests the end of a long phase in loose monetary policy. The last time Australia’s interest rates went up was in November 2010. Since then, it’s been a long, steady path down, culminating in the pandemic induced “emergency” rate setting of 0.1% that the RBA finally lifted to 0.35% today.
The broader economic landscape where this rate rise drops is a tough one for investors to navigate; US equities are down sharply this year and US Inflation is rampant. Energy prices are soaring as Russia’s invasion of Ukraine has thrown global energy supplies into chaos.
Australian markets were reacting to inflation with the anticipation of higher rates before today’s RBA move, with the Ausbond composite index down 5.9% to the end of April and the ASX200 down 3.5% YTD. Back in the old days, equities and bonds were considered diversifying assets with generally negative correlation. When bonds went up (as interest rates fell) equities were generally on the way down. If equities were running too hot, along with economic growth, rising interest rates (and therefore lower bond prices) would help to balance the portfolio.
This has all changed. Rates simply couldn’t go much below 0.1%. As they now begin to rise (and bond prices fall) equities are also struggling with a tough inflationary outlook, high energy prices and a higher discount rate on their valuations.
What is an investor to do?
In the dynamic environment we find ourselves in there are sure to be a lot of surprises. Are you watching the US Fed bond tapering program? Are you up to date with the European Central Bank’s latest open market operations? What will be the RBA’s next move? How will that impact the Australian dollar? And what is the outlook for credit and the hybrids market?
Individual investors are forgiven for being confused about all this. A simple passive allocation to some bonds and some equities was a safe strategy for a generation. Not anymore.
The current situation is a test for active managers. Given the uncertainty and unprecedented economic conditions, what is the best strategy for conserving capital and earning income?
In fixed income markets, it might be to employ an experienced team of analysts that can navigate these markets. A team with long experience and a solid track record. Thankfully for investors, finding such an active team of managers can be done by simply buying an active ETF.
eInvest’s suite of active fixed income ETFs are managed by the experienced team at Daintree Capital. In both hybrid and fixed income markets, they employ strategies to hedge risk, identify investment opportunities and avoid traps. Their track record shows that over the past year (to end March) the Core Income fund (ECOR) has outperformed the Ausbond composite index by 4.5%, providing investors with some security in a highly uncertain period.
The RBA has indicated rates are heading up. Property, bonds, and equities will all be affected by the evolving rate environment. It looks like a good time to quit being passive and go active.
Disclaimer: Please note that these are the views of the author, Tamas Calderwood, Investment Specialist at eInvest, and is not financial advice. Past performance is not a reliable indicator of future performance.
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