The forecast jump in interest rates in the immediate term as a counter to rising inflation resulting from the coronavirus is likely to be beneficial to the investment returns of retirees, a funds management executive has said.
“The silver lining for retirees [is] one of the long-lasting legacies of COVID-19 [which will see] the eventual exit of the negative interest rates [that] were starting to gather around financial markets around the world,” Vanguard global chief economist Joe Davis told delegates taking part in his firm’s 2022 Virtual Roadshow last week.
“What is perhaps surprising, but actually makes intuitive sense longer term, is that the higher interest rate environment that pushes down inflation, and leads to higher real interest rates, actually improves investment performance and the likelihood of success for all investors.”
Despite the benefit for retired investors with long-term strategies, Davis acknowledged markets could be subject to greater volatility in the short term as they tend to react adversely to more modestly restrictive financial conditions.
Market segments likely to be most unfavourably affected by this volatility are the tech sector, particularly unprofitable technology companies, speculative investments such as cryptocurrencies, and leveraged real estate investments, he said.
“That’s all true, but that is also, I think, part of a sideshow to an unassailable positive to the higher interest rate environment we’re entering [into] because it’ll keep a lid on inflation and it will improve a retiree’s success,” he noted.
According to Davis, investors will in all probability reap the benefits from just a modest rise in interest rates in the next couple of years.
Further, if the interest rate rise is more than modest, he anticipated investors will ultimately enjoy a level of returns not experienced since before the global financial crisis, he said.
“So this is a good news story,” he said.
