If the response to my latest poll turns out to be accurate, interest rates are about to stabilize.
I asked my social media followers where they believed interest rates would be one year from now. There were four options from which to choose. Here are the results:
- the same – 38 per cent
- lower – 35.2 per cent
- higher – 22.5 per cent
- don’t know/not sure – 4.2 per cent
The overwhelming majority (73.2 per cent) believe rates have reached or are near their peak and will drift down from here. Only 22.5 per cent of respondents think they will be higher a year from now. In other words, the “higher for longer” theory doesn’t seem to have much credibility right now.
This was a random social media sample, so the results should not be viewed as scientifically accurate. However, they provide an insight into how a segment of the population is thinking.
The implications are significant for investors. If you are among the minority who believe rates will keep rising, your investment strategy over the next year will be very different from that of someone who expects them to drop.
A rising rate environment suggests that inflation will continue at an unacceptably high rate, forcing central banks to keep tightening monetary policy. The result will continue to favour cash-type securities, such as high-interest ETFs and guaranteed investment certificates, along with shares in companies that have strong pricing power. Oil and gold stocks should do well in such a scenario.
Any securities related to real estate will continue to remain under pressure, as higher rates make housing more expensive. Interest-sensitive stocks such as telecoms and utilities will also continue to struggle.
Stable or falling rates will create profit possibilities in a range of securities. Bonds, which have been hit hard in the past 18 months, will offer the potential for capital gains as rates drop. Bank stocks should rebound as the risk of default lessens. Pipelines and REITs will be attractive again.
We’ll get an indication of the Bank of Canada’s current thinking at its next policy announcement, on Sept. 6. The surprise revelation last week that our economy contracted 0.2 per cent in the second quarter has some economists predicting the central bank will stand pat for now.
No one knows with certainty how the coming months will unfold. But if you have a strong belief regarding the direction rates are headed, make sure you implement an investment strategy that reflects your views and will reward you if you’re right.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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