Home Short payment terms Five investment options to combat rising interest rates

Five investment options to combat rising interest rates


Globally, we have seen coordinated action to fight inflation, with rising interest rates being a common feature this year, and it is expected to continue through early 2023.

This provides investors with the opportunity to seek out asset classes that are doing well during an up cycle.

1. Floating Rate Notes: As an income investment, Floating Rate Notes pay a coupon (interest payment) above a rated benchmark, such as the Bank Bill Swap Rate (BBSW) – which is an independent benchmark rate strongly correlated to the RBA cash rate.

For example, a floating note paying a coupon of BBSW + 200 basis points (bps) means that the interest payment is 2% above the benchmark rate. If the RBA raises interest rates, this will be reflected in the interest payments your floating notes will receive.

As income from floating notes improves during cycles of rising interest rates, this means that the price of floating notes in the secondary market tends to be more stable compared to fixed bonds.

Floating rate notes are available in both investment grade bonds and hybrid securities.

2. Currency investments: Currencies generally reflect the economic and inflationary outlook of the host country, and the variation between the economic drivers of two countries can create differences in how markets perceive the value of these currencies. For example, if the US Federal Reserve (Fed) has a higher cash rate compared to the RBA, it usually causes the US dollar to appreciate against the Australian dollar. Currently, we are seeing the Fed raise rates more aggressively than the RBA, which is why the Aussie dollar has fallen this year. For investors who believe the Fed is likely to continue raising rates more aggressively, they may consider diversifying their USD currency exposure.

Currency movements can be attractive, holding USD has been one of the few assets to rise this year.

Against the US dollar, the Australian dollar has fallen from 0.75 US cents to 0.63 US cents in the last 12 months, which means that if you had converted to US dollars a year ago, your investment would show a return of 16% compared to a decline of 10%. the S&P/ASAX200 from the start of the year to the end of October.

3. Dual Currency Investments: A short-term investment where investors seek a higher yield from deposit rates in exchange for accepting currency risk.

Essentially, you create a currency-based trade by depositing funds with a bank in a base currency (AUD) and naming an alternate currency like USD or EUR. You name the duration of the transaction and the exchange rate when converting. If the bank accepts the transaction, they will decide which currency they will use to make the conversion, so you should be ready to receive the AUD or the alternative currency at the end of the transaction, which usually takes days, weeks or months. . You must also be convinced of the performance of the currencies over the life of the investment.

There are generally 2 outcomes if the price at expiration is:

1) Less than or equal to your referral level, you will receive your initial investment amount plus interest. No conversion is required.

2) Above your reference price, NAB will exchange your spot currency for the alternative currency at the designated reference level plus interest earned. In this case, the investor will sell their held currency at a level below the current market value.

4. Product structured in shares: Equity Referenced Term Investments or “NERTI” are short-term investments, suitable for wholesale investors with a view of the direction of the equity market and who wish to derive income from this belief without physically owning shares.

In NERTIs, an investor selects an ASX-listed stock of their choice, called the reference security, and a conversion price, called the reference price. The maturity of the investment can be set between 1 month and 364 days.

Where you set your reference price, relative to the current price of the stock you have chosen, will determine your rate of return.

A higher benchmark price will result in a higher rate of revenue. The income you earn is not affected by any fluctuation of the shares chosen, however, the repayment of your initial investment amount is determined by the price of your chosen shares at maturity.

There are usually 2 outcomes If the price at expiration is:

  1. Above your reference price, you will receive your initial investment amount plus interest.
  2. Less than or equal to your Reference Price, you will receive your interest payments, but your initial investment will be converted into shares in the selected shares at the agreed conversion price. In this case, you will be converted into shares at a price above the current market value.

5. Cash is king: Prior to the cycle of rising interest rates that began this year, cash was an unattractive asset to hold. This is because when rates are close to zero, other investment options such as stocks outperform, as traditional fixed income instruments such as time deposits and savings accounts offer minimal returns.

However, rates are rising and stock markets are volatile, making fixed income an increasingly attractive asset class to hold.

For the investor, one of the main advantages of cash is that it allows you to keep some “dry powder” to take advantage of opportunities that arise when growth-oriented markets resume their upward trend. View available interest rate options

Always consider the risk of any investment

All investments involve risk, and generally the more risk you accept, the more return you expect.

For example, for bonds, the risk is that the company defaults on its payment obligations. All bonds are rated by one or more of the international rating agencies, and this provides a good guide to the risk you are accepting. On the other hand, hybrids may have unique terms and conditions and may have triggers to convert into shares.

For currency trading, you need to consider the global environment and how the currencies you trade in may be affected by local, regional or wider events. If a currency moves contrary to your expectations, you risk putting your capital at risk. The same goes for derivative investments, if the trade moves in the opposite direction to your expectations, you may receive your interest payments but lose some or all of your original invested capital.

Understanding risk is essential to being a confident and successful investor. Our investment specialists are here to provide you with the knowledge and tools you need to make informed decisions, pursue your wealth goals and maintain your investments throughout the investment cycle.

The information in this article has been compiled from several sources believed to be reliable as of the end of October 2022 and is intended to be of a general nature only. It has been prepared without regard to anyone’s objectives, financial situation or needs. Before acting on this information, National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit License 230686 (NAB) recommend that you consider whether it is appropriate for your situation. NAB recommends that you seek independent legal, financial and tax advice before acting on the information in this article.