Higher interest rates result in greater financial uncertainty.

With the RBA having just announced their fifth consecutive month of interest rate increases being a swift policy change combatting the inflationary forces, there is little doubt that households will now start to feel the pressure of higher living costs combined with their higher mortgage funding.??

Whilst higher interest rates are difficult news for borrowers, they are welcomed news for investors who can now adjust their yield targets higher.? Investors can seek higher returns when making new investments, however the higher rates can bring greater financial uncertainty to existing asset values which are re-assessed under the new higher rates regime.?

A general property market price correction in this light, which has already clearly commenced, does makes sense and is totally necessary in light of the extent of pandemic price gains that we witnessed.??

The economic strength of our country is robust and is well positioned to manage through these higher rates, particularly given the record low unemployment levels as the starting point, and the buffers built into household balance sheets throughout the pandemic.? The outlook for asset prices however is going to be less certain and will create some general investor uncertainty.

This could be an opportune time for investors to assess how their portfolios performed in terms of their price correlation across assets over the last six to twelve months particularly, given the higher levels of general market volatility.? Investors should ensure they have their asset balance right across their portfolio, ensuring portfolios are robust and not moving all in the same direction when the asset prices are being revalued.

This balance is more likely to be achieved when a portfolio has a combination of adequate income producing, that is yield paying investments that provide some cash flow certainty, combining with growth opportunities that provide longer-term price gains that can well exceed inflation.??????

Alternative assets can help build more robust investor portfolios.? Alternatives can provide exposures with low or in some instances no correlation in price volatility to other areas of an investor’s general portfolio.? Investors can take advantage of the consistency of cash flows being provided by private credit opportunities, perhaps combining these with any dividends they receive from their listed assets in their portfolio.? Whilst growth opportunities can be found across private equity, as well as bespoke property opportunities that are well structured and fairly priced.

At iPartners we are focused on increasing our investor’s understanding of alternatives and the benefits of including alternative investments in portfolios to provide diversification.??