Financial Planning in a Rising Interest Rate

Financial Planning in a Rising Interest Rate

Despite the fact that many investors and analysts focus on low-interest rates, rising interest rates are altering the face of the market for enterprises and individual investors. Countries all over the world are attempting to overcome the pandemic's economic repercussions, as well as the consequent ultra-low interest rate policies. To hasten the post-pandemic economic recovery, the world's largest economy, the United States, has announced that it will hike interest rates, as have many other countries. This year, the UAE's central bank has also planned a series of additional rate hikes to prevent the economy from overheating and push down inflation, which is at its highest level in four decades. So, to take advantage of the current climate, especially if you plan to make a substantial purchase, invest in a business, or take other important corporate action this year, make sure your financial plans stay on track. 

 

Fixed Income – The Safest Option

Fixed income options like certificate of deposits (CDs) can be used as a safety net versus more volatile investments such as stocks. With the rise in interest rates, the annual percentage yield (APY) on CDs shall also rise, which means that it is a good time to start putting more money into fixed income. Although analysts warn that the potential benefit of a higher rate of return on savings may be minimal in most circumstances, fixed income options are generally a better option after an interest rate hike.

 

Inventory

Businesses dealing in raw materials are often seen as inflation hedges as the price of raw materials generally remains steady or falls when interest rates rise. As a result, companies should consider not investing aggressively in inventory build out.  This assessment is obviously not relevant for all commodities and is more of a macro play.

 

Short-Term or Floating Rate Bonds

During times of uncertainty, diversifying your portfolio is critical. During rising-rate situations, bond investors can reduce portfolio volatility by switching to or investing in bonds with short maturity dates or acquiring bonds with coupon rates that float in tandem with the market rate. So, in the long run, diversifying the investment portfolio can assist in protecting the entire investment portfolio from the effects of shifting interest rates.

 

Stock Market

As interest rates rise, riskier investments like equity typically pare down their gains. A regular investment plan should be continued but substantial investment in stocks in a rising interest rate scenario is generally not suggested.

 

RSM Insights

Since variations in interest rates can have a variety of effects on investments, there is no single course of action you should take when they shift. So, it's wise to keep an eye on your financial goals and work with a financial advisor to build a diversified portfolio to weather any short-term rate changes. 

 

Feel free to consult RSM UAE for a more in-depth analysis of rising interest rate scenarios. RSM is one of the world's leading audit, tax, and advisory service networks, recognized for innovative solutions across the globe. RSM professionals can help your company undertake the granular analysis required for a comprehensive financial planning exercise.

 

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