Have low interest rates made risk assets too expensive?

240102020_Interest rates

Have low interest rates made risk assets too expensive?

Around the world, plunging interest rates have led to a stampede by investors into risk assets, like shares and property. With the prices of these assets now looking quite inflated, investors need to do more research than ever to find under-valued assets.

While I take it for granted that falling interest rates exert a positive influence on asset prices, it is perhaps not as obvious to others who might allow their investments to jump at the shadows of trade deals, Trump tweets and Brexit concerns.

As the year begins, it is worth keeping in mind the power exerted on asset prices by interest rates. As we witnessed in 2019, that power exceeds all the fears that might have inhered in short-lived geopolitical and financial machinations.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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6 Comments

  1. Hi Roger, do you think the feds intervention in the repo market is a sign of short term rates rising? Because it seems without their intervention which seems to have gone from temporary to permanent intervention, short term rates would be very much higher, as banks obviously don’t trust each other, because of the massive amount of risk building in the debt markets .
    It seems the more the fed intervenes, the more they get trapped, eventually they must be called out by the masses who are being punished by the fed, meaning those who don’t hold assets , what was that about “ what cannot go on forever will stop” , I just think that people seem to comfortable with the lower for longer story.

  2. Totalwealth Plan
    :

    Great article Roger. I explain value to my students in a slightly different way. Value is the discounted value of future benefits. When interest rates go down we discount future benefits by a lower discount rate to arrive at a higher value.
    Blessings
    Shantha

  3. The average price of Telstra is ~ $4 over 20+ years. You can trade it & make money but I prefer growth shares like CSL anytime. Having said that, CSL is expensive at the moment, trading @ a P/E of ~ 74 so probably best to hold off buying until it gets cheaper (as per article’s sentiments)

    re: prudent active investments – I’d like your thoughts on the following article & comment
    https://www.afr.com/wealth/personal-finance/why-investors-are-shunning-active-and-chasing-passive-20190923-p52tyc
    In support of the premise of this article, Warren Buffett has been quoted as saying (I’m paraphrasing) to buy low cost index funds. However, I would classify him as a high conviction investor who ACTIVELY prefers to buy companies. In that sense, there appears to be a contradiction between his actions and his advice.

    • Apologies for the delay in replying Joe and thanks for your comment. Yes, there’s an incongruity in Buffett’s actions and words. But it is helpful to put his position into context with a couple of his previous utterances;

      1) “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor, but you think you know something.”

      and

      2) “By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

      The advice to invest in index funds appears to be directed to the know-nothing investor.

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