Amid increasing talk of cutting interest rates, how can you protect your investments?
Amid a cooling US jobs market and declining inflation, it now seems almost certain that the Federal Reserve (‘the Fed’) will cut interest rates in September. The Fed has continued to raise the federal funds rate – the interest rate it charges to its member banks, and a key lever for controlling money supply and inflation – for an unprecedented 11 times over a 16-month period.
Concerns about a potential recession have also eased considerably in a short space of time. Investors have recently been pricing in a “Goldilocks” scenario of strong growth with moderate inflation. This came after a period when analysts were questioning whether the Fed had risked the US economy slipping into recession due to its slowness in cutting rates.
The Bank of England, meanwhile, spent two years putting up interest rates at nearly every meeting, and then for a year after that, left them at a painfully high level for many households and businesses. Finally, on 1st August, a rate cut was confirmed, amid speculation that they could be reduced further in the near future.
Moves that investors might look to make now
So, on a backdrop of ongoing or probable rate cuts among the world’s central banks, investors might reasonably ask what steps they can take to help protect their investments during this period. An investment advisor might suggest that such individuals consider the following moves:
- Acquiring gold
Gold has recently managed to hit a new all-time high, while relatively little attention was given in the financial press. And yet, the fundamentals of gold still persist: this precious metal serves as a safe haven asset with value that endures even during times of geopolitical uncertainty and currency instability.
Gold’s momentum lately has been fuelled by expectations of the Fed cutting rates soon, along with a slight dip in the dollar, and continuing geopolitical tensions in the Middle East. So, from both a near-term and longer-term perspective, there are solid grounds to be bullish on gold.
- Investing in high-yield bonds
As reported by The Wall Street Journal, “2024 has been Wall Street’s year of the bond fund … bonds are paying their highest yields in a generation”.
This observation tallies with the historical tendency for high-yield bonds to perform strongly during times of declining interest rates, when investors tend to look to securities that can provide a more generous return. The recent situation marks quite the contrast with 2022, when the Fed’s aggressive rate hikes clobbered US bond prices.
- Tapping into the REIT sector
Real estate investment trusts (REITs) are companies operating across a broad range of property sectors; they own, operate, or finance income-producing real estate. Investing in REITs, then, provides investors with a means of generating income from real estate without the need to directly purchase, manage, or finance properties themselves.
The last few years of inflation and high-interest rate environment have presented major challenges to REITs. However, with the fading of those headwinds, many experts have rightly pointed to REITs as an investment product to own right now.
With the REIT sector closely linked to the debt markets, such companies will stand to benefit as borrowing costs fall.
