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“Higher For Longer” — How To Invest In 2024 With High Interest Rates

Last Updated December 3, 2023 1:12 PM
Giuseppe Ciccomascolo
Last Updated December 3, 2023 1:12 PM

Key Takeaways

  • High interest rates can pose challenges for investors, as they can make bonds less attractive and lead to slower economic growth.
  • Investing in shorter-duration bonds may minimize the impact of interest rate fluctuations.
  • Federal Reserve is expected to be the first central bank to cut rates in 2024.
  • Can cryptocurrencies offer potential as a hedge against high interest rates?

As the world grapples with rising inflation and the prospect of higher interest rates for an extended period, investors are facing a new set of challenges. The “Higher for longer” mantra, coined by central bankers, signals a shift in monetary policy that could have a significant impact on asset prices and investment strategies.

While higher interest rates can be beneficial for savers, they can also pose challenges for investors. This is because higher interest rates can make bonds less attractive, as their yields are lower than those of newly issued bonds. Additionally, higher interest rates can lead to slower economic growth, which can hurt stock prices.

Stock Market To Become More Selective

“We anticipate a shift toward a more idiosyncratic and selective stock market in the coming years, driven by the burden of higher interest rates and an elevated cost of capital,” said John Tousley, Global Head of Market Strategy at Goldman Sachs Asset Management .

According to Tousley, this new phase has shown unprecedented factors, including historically high stock valuations and peak interest rates.

Facing this new regime, investors must navigate challenges and recognize its implications. While it is unlikely that equity returns will reach previous supercycle levels, the era of “There Is No Alternative” – also known as “TINA” – to the stock market is evolving into “There Are Reasonable Alternatives” or TARA.

“Investors are encouraged to explore alternative opportunities beyond stocks.”

Moreover, the long-term scenario of high rates may shift market preferences from revenue growth to profitability. This shift may moderate performance differentials among sectors, company sizes, and regions, creating a less extreme and more nuanced landscape.

Emerging areas of innovation, such as artificial intelligence and green investments, further contribute to this evolving market dynamic.

Bond Is Still The Most Favored Asset

“In our view, investors can reengage with the potential strategic advantages of the bond sector to generate a reliable future cash flow, provide a functional hedge against stock volatility, and enhance return asymmetry. While bonds may offer opportunities in this scenario, careful considerations are necessary.”

Goldman Sachs Asset Management urges reflection on the duration of government bonds. Despite the allure of maintaining a short duration with the current 5.55% rate on six-month U.S. Treasury bills and the 4.62% yield on 10-year bonds, historical patterns suggest that the Fed’s pause in rate hikes reliably signals an imminent normalization of the term structure of rates, reflecting a positive slope generated by term premiums.

In conclusion, analysts believe that bond prices are theoretically less impacted by rising rates today. And, more importantly, are theoretically more rewarded in the event of a decline—a scenario more likely now than in recent years.

Can Crypto Shine With High Interest Rates?

Cryptocurrencies have been touted as a potential hedge against inflation, but their performance during periods of high interest rates has been mixed. In some cases, cryptocurrencies have performed well during periods of high interest rates, while in other cases they have underperformed.

One reason why cryptocurrencies may be a good investment during periods of high interest rates is that they have no direct tie to the traditional financial system. This means that they are not as susceptible to the effects of monetary policy, such as interest rate hikes. Additionally, cryptocurrencies are a relatively new asset class, and they may be less correlated with other asset classes, such as stocks and bonds.

Anyway, particularly for the U.S., the Fed is likely to be the most dovish central bank in 2024. In fact, experts estimate that the American central bank will be the first to cut interest rates. This could certainly help people save more money, calming the volatility we’ve seen recently and boosting investments in riskier assets. Cryptocurrencies may surely benefit in this scenario.

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