Will we finally see interest rates rising in 2016?
There doesn’t seem to be a week that goes by without commentators giving everyone their view on the distinct possibility of a rate rise occurring this week, this month, or indeed this year.
Personally I try not to predict when or if The Bank of England Governor Mark Carney will decide to pull the trigger on a rate rise. Looking at his track record of communicating the bank’s intentions to investors, and his stance on interest rates, seems to have the experts foxed. None of us really know what he’ll eventually decide to do, and importantly when he’ll do it.
Working on the basis that interest rates will rise at some point, and if the so-called experts are to be believed, then a rise isn’t imminent. On this basis, we should be expecting the first quarter-point increase from the current historic low of 0.5% to be implemented during the second half of 2016 at the earliest.
How is this likely to impact on shares?
A rise in rates is often seen as a negative for the traditional defensive income stocks, or so-called bond proxies. The thought behind the negativity involves the belief that higher interest rates mean investors no longer need to take on the risk involved in the purchase of shares in order to gain a decent level of income. Instead the idea is that they can snap up safer, similar returns from cash, which doesn’t come with the same risks as shares.
While I don’t tend to react to every news report I read, I felt it worthwhile conducting some research of my own. A quick tour around the internet lead me to the savvy saver’s friend, Money Saving Expert.
Apparently, the best easy access savings account currently pays a paltry 1.65% per annum, and while savers can get higher rates with tie-in periods and different bank accounts, there seem to be few places that will give a 5%-plus return on hard-earned savings.
Why shares are still best
While it’s foolhardy to invest your entire worth in stocks and shares, I think that investing (or indeed saving) based on the ever-changing macro picture can be a costly game.
And for me, quality defensive shares, which importantly pay an above-average and growing yield, still offer attractive returns, both in terms of growing income and the potential of capital gains over the long term.
As part of a quality income-producing portfolio, you should try to look for stocks of good companies trading on reasonable valuations, rather than worry about which way interest rates will go in the short term. Instead of trying to second-guess our policy makers, try to pick up higher-yielding companies with a defensive moat that allow you to sleep soundly at night.
However, not everyone has the composure to invest in shares, which means that the market can sometimes throw up good buying opportunities as investors sell off good stocks purely because the macro situation may change… at some point in the future. Sometimes it can pay to keep watch.
