As interest rates rise history shows investors can still beat the cash rate by investing on the stock market
Since at least 1926 Australian shares have comprehensively beaten cash and bonds
Stockspot’s best ETF portfolio for a time of higher inflation and rising interest rates
Interest rates are rising, which while it may not be good news for mortgage holders, you’d think it would be good for term deposits.
The Reserve Bank of Australia this week hiked the cash rate by 25bp to 3.35% as it works to bring stubbornly high inflation back to its 2-3% target.
But while the cash rate has risen now nine times since the RBA started its tightening policy in May 2022 and banks have been quick to pass on the hikes to consumers, there’s been concerns they haven’t been so fast passing them on to depositors.
In January Chalmers asked the Australian Competition and Consumer Commission (ACCC) to investigate bank deposit pricing.
Where to put your money now interest rates are rising?
But while interest rates may be rising, are you better off putting your money in a term deposit anyway, or investing in shares or an ETF?
Stockspot founder and CEO Chris Brycki told Stockhead as the economy is moving towards higher interest rates, history has shown you can still beat the cash rate by investing on the share market.
“Shares have historically outperformed cash because of the ability of businesses to pass price increases along to their consumers, resulting in higher income and returns for both the company and investors,” he said.
“One of the central characteristics that helps companies and their investors endure or even profit from inflation is pricing power, which is a company’s ability to pass on rising input costs to customers.
“This helps them retain their profitability by raising prices during inflationary times.”
Brycki said since at least 1926 Australian shares have comprehensively beaten cash and bonds.
“That is why we recommend those ETFs which are a mix of Australian shares, emerging markets shares and international shares,” he said.
Stockspot’s five ETF suggestions to beat the bank
Stockspot is an online investment advisor which builds custom portfolios using ETFs. Stockspot’s best ETF portfolio includes five ETFs which could do well in a time of higher inflation and interest rates.
“As always we would recommend owning the ETFs as a portfolio and not on their own as it’s likely not all of them will perform well over the next 2-3 years but in combination they’re likely to be better than leaving money in the bank,” Brycki said.
“Australian shares are benefiting from a higher allocation to resource and banking shares which tend to do well in an environment of rising interest rates and inflation,” Brycki said.
Brycki said having an unhedged exposure to global shares provides some cushion if markets are volatile because you benefit from a falling Australian dollar.
“We recommend the global 100 ETF to clients, in an uncertain economic environment large established businesses tend to do better than smaller companies,” he said.
Stockspot recommend a 15% allocation to gold for all their clients. Brycki said one reason why is to protect against 1970s style inflation.
“During this period, nominal returns were reasonable, but high inflation caused a loss of 60% of the real value of a traditional 60/40 portfolio between 1970 and 1975,” he said.
“A significant allocation to gold, which rose 144% during that time, would have greatly improved portfolio returns.”
“Government bonds now pay a yield of close to 4% per annum so provide a good level of income while also providing a portfolio cushion if we go into a recession and the central bank needs to start cutting interest rates,” Brycki said.
Performance of the ETFS over five-year period
Looking at historical returns of the ETFs, Brycki recommended cash is beaten by Australian and international shares and even gold.
The patchwork quilt and why it’s difficult to pick an exact winner
Brycki said it’s extremely difficult to know what a winner will be in any given year and last year’s winner could be this year’s loser.
In what he and the Stockspot team refer to as the “quilt image” (resembling a patchwork quilt) one year gold might be up but another year global or Australian shares.
“Rather than buying and selling shares and trying to pick a winner every year, most investors would benefit from just buying and holding a core group of shares that offer diversification – local shares, emerging market shares, international shares, bonds and gold – and reaping the benefit of long-term passive investing,” he said.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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