Is now the time to move on from Term Deposits?
Investors are starting to question whether it is wise to extend term deposits for another year or to venture back into the share market. The surge in interest rates and the fluctuating share markets have enhanced the appeal of term deposits. However, projections for interest rates now indicate that they have reached their peak and are poised to decline. This is causing a dip in the term deposit rates now being offered by the banks.
Here is a chart of the 3-month bank bill swap rate as projected by NAB.
Term deposit rates will reflect the fact that interest rates will be heading lower from here.
Have we reached the sweet spot where it is time to stop rolling over into new term deposits and instead allocate that money back into a recovering share market?
Leading economic indicators suggest that we have likely witnessed the worst of the economic downturn and we can anticipate a recovery within the upcoming 12 months.
This chart shows that leading indicators are in the bottom part of their historic range. This is where we should be looking for the start of a recovery. When compared to the S&P 500, this is the time when you start to achieve positive returns in the share market .
Share markets are forward looking, so they are already now starting to move higher. A recovery in leading indicators is anticipated to trigger a further upswing in the share market over time. With leading indicators having plenty of room to move higher, this means we are looking at a multi-year rally in share markets before we hit the next peak again. The top of the leading indicators leads to share market declines. A bottom in the indicators leads to share market rallies.
As investor’s term deposits come to an end over the next few months or so, many more will consider whether to roll back into a new term deposit at declining interest rates, or put that back into share markets which have already seen the worst.
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Given these factors, this should be the moment to contemplate what you will do when your term deposit matures and if now is the moment where you should be transitioning from term deposits to investing back into the share market.
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Michael Gable is the founder and managing director of Fairmont Equities.
Disclaimer: The information in this article is general advice only. Read our full disclaimer?HERE.
Fairmont Equities Australia Pty Ltd is holder of Australian Financial Services Licence No 494022