MEDIA RELEASE: Investors should revise their expectation of comparative returns from their risky and secure investments, as the impact of consecutive rate rises normalises levels of return, according to HLB Mann Judd wealth management partner, Jonathan Philpot.

Mr Philpot says the gap in returns between different investment types is now around five per cent, having been closer to ten per cent over the past decade.

“Now that much of the interest rate movements have occurred, investors should be reassessing their expected returns across share markets and fixed interest.

“For the ten years up to 2022, every additional ten per cent of their portfolio allocated to risky assets delivered an additional one per cent per annum return. For example, the 60/40 balanced portfolio delivered a return of nine per cent, the 70/30 balanced portfolio around ten per cent, and the 80/20 portfolio 11 per cent.

“However, these returns will not be replicated for the next ten years. For equities, you should expect a return of 7-8 per cent and fixed interest a 3-4 per cent return. We’re entering a very different environment for investment returns,” he said.

Mr Philpot said it is the smoothness – or lower volatility – of the market that is important, particularly for retirees. For the ten years up to 2021, investors enjoyed positive returns, with 2022 coming as a surprise for retiree investors.

“The risk premium is justified as share markets will often move downward within a one-year period of about ten per cent, so particularly for retirees, the stability of returns over their lifetime is an important factor.

“For those investors who have increased their risk allocation over the last 10 years, it may be worth starting to consider slowly reducing their exposure to the share market, particularly as markets move into overvalued territory over these next few years.

“Some other asset classes, such as infrastructure investments, high yield debt and hedge funds, could be considered as alternative investments for share markets, however it is important to understand the underlying risks in all of the different type of asset classes,” he said.

Another beneficiary of the higher interest rate environment is the short-term investor – those with an investment horizon of less than three years – who may be saving for a home deposit or large capital purchase.

“These investors can now invest in a term deposit or higher interest-earning accounts and receive a return on their savings,” he said.

According to HLB Mann Judd restructuring and risk advisory partner, Todd Gammel, 13 consecutive years of record-low interest rates followed by ten straight increases is also having a substantial impact on businesses, with the SME market in particular being affected.

“The current economic climate is making it difficult for some businesses to access capital and debt to fund operations. While supply chain issues have eased, relative to 12-18 months ago, it continues to have a knock-on effect for some.

“The uncertainty around rates and the steep manner in which they have risen means business owners need to manage funding risk more closely.

“The Silicon Valley Bank collapse has highlighted the need for management to understand and hedge risk in a changing environment with greater scrutiny. Taking a small loss on a poor investment or strategy is a learning experience, losing the business because of an unwillingness to close the position or accept the loss earlier places concern around adherence with personal obligations,” he said.

Mr Gammel said rising interest rates are also resulting in an increase in distressed businesses, while prospective acquirers have missed the opportunity to use cheap capital.

“Rising rates have, to a degree, put a handbrake on some businesses looking for greater scale through acquisition but given there are some sectors still struggling, particularly construction and some retail sectors, the opportunity to acquire hasn’t altogether passed.

“Not only does an acquisition add scale, increase hard to find workforce, they can improve the margin and market position of both businesses by operating as a single entity,” he said.