Lowering rates open possibilities in these 5 investment funds
In a rapidly changing economic landscape, investors are seeking opportunities to capitalise on the shifting tide, particularly as major economies, such as the US, Europe, and the UK, are expected to see a gradual lowering of interest rates in the coming years.
Recent polling from Reuters suggests the federal funds rate could fall to 3.50-3.75% by the end of 2025, following a 75 basis point reduction by the Federal Reserve and the European Central Bank (ECB). The Bank of England has also cut interest rates by 50 basis points this year, with further cuts anticipated over the course of 2025.
Given these forecasts, funds with exposure to long-duration bonds and growth equities are positioned to capitalise on this trend. Long-duration bond funds, such as those focusing on long-term bonds, generally benefit when interest rates fall, as bond prices tend to rise. Equity funds with a growth focus, particularly in sectors like technology and healthcare, are also likely to perform well. For instance, the Fidelity Index US P Fund, which holds large-cap growth stocks, has shown strong performance and could benefit from a falling rate environment.
Defensive and wealth preservation funds, like money market instruments and wealth preservation trusts, could remain attractive for risk-averse investors. These funds usually deliver safe, stable returns, although falling rates might initially compress yields. However, they are known for their resilience during market volatility and capital preservation.
In uncertain economic or geopolitical environments, gold funds have traditionally performed well and could continue to benefit if rate cuts coincide with market volatility or inflation concerns. With the gold price having risen more than 30% year-to-date, it could offer a hedge against geopolitical risks and potential inflation due to tariffs.
When considering share buybacks, the yield on UK equities is closer to 6%, according to Computershare, while the yield on 10-year Treasuries in the US is currently 4.29%. The financial services company forecasts a prospective UK equity yield of 3.7% over the next 12 months.
For those seeking exposure to the financials sector, particularly in the US, the Polar Capital Global Financials Trust could be a potential option. The iShares UK Dividend UCITS ETF, on the other hand, is a fund that could be considered for adding a UK income fund to a portfolio.
It is important to note that while these funds may present opportunities, they are not without risk. Investors should always conduct thorough research and consider seeking advice from a financial advisor before making investment decisions.
As the economic landscape continues to evolve, it is crucial for investors to stay informed and adapt their strategies accordingly. With a pro-growth agenda and potential inflationary headwinds expected in the US due to Donald Trump's victory and the Republican clean sweep of Congress, a less aggressive approach to anti-trust measures and financial deregulation could spur an uptick in M&A in the US, offering further investment opportunities.
In the UK, the Labour government's first Budget has led to a surge in gilt yields, suggesting that the economic outlook could be more complex than initially anticipated. Nevertheless, with the experts at Capital Economics expecting UK interest rates to fall to 3.50% by early 2026, there are still opportunities for investors to capitalise on the shifting economic landscape.
- Long-duration bond funds, such as those focusing on long-term bonds, could capitalize on the predicted lower interest rates as bond prices tend to rise when rates fall.
- In uncertain economic or geopolitical environments, gold funds have traditionally performed well and could continue to benefit if rate cuts coincide with market volatility or inflation concerns.
- Defensive and wealth preservation funds, like money market instruments and wealth preservation trusts, could remain attractive for risk-averse investors, despite initially compressing yields in falling rate environments.
- For those seeking exposure to the financials sector, particularly in the US, the Polar Capital Global Financials Trust could be a potential option, while the iShares UK Dividend UCITS ETF could be considered for adding a UK income fund to a portfolio.
