Steve Thaxter- Senior Partner and Principal Adviser
Sovereign Wealth Partners
The unexpectedly sharp rise of inflation and interest rates around the world in 2022 has brought many asset prices down substantially. It’s been a very rough 6 months for most investors, particularly those with substantial exposures to bonds and growth stocks.
But in the last month we’ve seen a reprieve in the red ink across financial markets. Perhaps the key reason has been that whilst US inflation is still to peak, quarterly economic growth numbers in the US have swung into negative territory and, as a result the Fed Reserve has signalled that it may be close to pausing its interest rate hikes.
With bond and money markets looking more settled, it’s worthwhile taking stock of the yields on offer for investors today. The table below sets out the typical yield expectation (technically the yield to maturity, after the fund manager’s fee) when buying various assets at today’s prices. Lines in italics are subject to various revaluation and credit risks. Broadly, the investment risk and recommended investor timeframe increases as you move down the table.
Overall, the yields on offer are certainly more “interesting” than at the turn of the year. The bond market has been through its worst quarter for 50 years and our view is that the downside risk is now much lower than it was, so it makes sense to revisit some of our preferred asset mixes.
Whilst the increased yields are welcome, for the moment investors are still losing purchasing power since Australian official inflation is running at 6%. The RBA expects inflation to peak at nearly 8% later this year and then gradually fall towards 3% in 2024.
One thing is for certain – the real value of “lazy” cash is being quickly eroded by inflation. Beyond what you need for short term liquidity purposes, surplus cash should be put to work even if it’s in higher yielding savings accounts or term deposits. As always, it pays to shop around.
Don’t hesitate to talk to your Sovereign Adviser if you feel your yield portfolio needs repositioning.