Strategize when the interest rate is down
Immediately after the news that the central bank is preparing to announce the policy interest rate adjustment. Whether adjusted up or down, it will cause investors to be prepared to deal with the change if interest rates are truly adjusted, especially adjusting investment portfolios in line with interest rate conditions.
The Policy rate is a financial policy that has the Monetary Policy Committee (MPC) be responsible for determining whether to raise or lower the policy interest rate. MPC will use the latest data in finance, foreign affairs, private spending, and production, including various factors that will affect the prices of goods and services, such as world oil prices or world agricultural prices including risks to financial stability. There are also many other factors that are considered to adjust or decrease such as exchange rate, trade balance, fiscal balance, capital inflow and outflow, political situation, etc. Then the MPC will consider economic and inflation outlook and decides monetary policy to increase, stabilize, or reduce policy interest rates.
In principle, the increase in policy rate indicates that the economy was growing at that time. Product prices rise causing inflation to move up. But the purchasing power of the people began to decrease (The same amount of money but can buy less because the product price is rising). The MPC, therefore, tries to reduce inflation by hiking the policy rate.
If there is a policy rate cut (relaxed monetary policy), it shows that the economy began to slow during that time. Inflation is low and people rarely spend. The MPC, therefore, lowered the interest rate to stimulate the economy to recover.
Whenever the policy rate changes, regardless of whether the adjustment is up or down, the assets will be affected. Therefore, investors need to adjust their investment plans in accordance with the situation. And from various situations that arise, it is likely that the MPC will decide to cut the policy rate down. So, let's see what investment assets are suitable for the downturn era.
1. Debt securities
The relationship between interest rates and the value of debt securities will be inversely proportional to each other. When interest rates rise, the value of debt securities will decrease. On the other hand, when interest rates fall, the value of the bond will rise. So, when interest rates change, it will affect the return on the bond investment. Investors must adjust investment plans in accordance with the situation.
Therefore, it is recommended to invest in short-term debt instruments during the uptrend of interest rates in order to reduce the chance of loss from lower bond prices. And on the other hand, during the interest rate downtrend, they should choose to invest in long-term debt instruments to benefit from the higher bond price.
However, the risk of falling prices when interest rates change will not affect those who hold the debt until maturity. Because the full amount of the principal amount will be refunded although the market price of the bonds may fluctuate depending on the interest rate trend.
2. Property funds and REITs
During the policy rate is on the downtrend, real estate funds and real estate investment trusts (REITs) will become more popular. Because the nature of the business is renting out, the main income from both funds is the rental fee. Then, the fund uses the rent to pay dividends to investors in the form of dividends.
And according to the rules, investors will receive returns in the form of dividends of at least 90% of the net profit. Major dividends are usually paid once a quarter. For example, if the fund has a net profit of 100 baht, it must pay dividends to investors at least 90 baht. Properties and REITs are suitable for the interest rate downtrend. Because investors still receive dividends regularly.
3. Stocks and mutual funds
When interest rates are on the way down, the stock market will be bustling as investors move more money to invest because of low financial costs from interest rates. While the return on investment in stocks will be at a high level but the risk also increases as well.
Therefore, if investors are interested in investing in shares but cannot accept the high risk. The solution is to invest in stock mutual funds. There will be investment experts to take care of the investment, help to filter out another step of risk. It is a way to reduce losses from falling stock prices.
Although the interest rate is down and the economy is slowing down, arranging the investment port appropriately to the situation will reduce the risk. At the same time, it can create impressive return levels