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Tony Morgan unpicks the changing challenges for equity investors when interest rates rise. Company debt and leverage are tougher problems, dividend flows more valuable

Personal Finance / opinion
Tony Morgan unpicks the changing challenges for equity investors when interest rates rise. Company debt and leverage are tougher problems, dividend flows more valuable
cash is king again
Is cash King again? And what does that mean for equity investors?

I had a dream that interest rates were rising, that finally my cash in the bank was going be worth something, with the potential for higher interest earnings.

Oh, yes all this. And it is happening. No dream.

Now interest rates swaps do not mean too much to me, but with the news they had gone through the roof, meaning interest rates are likely on the rise, my thinking obviously went into overdrive.

Thus, the once-famous concept hit me in: The King, cash.

Could the return of the King be true? After 40 years of generally lowering interest rates are we finally going to see a reversal?  And from my perspective as a portfolio manager of my family’s affairs what does this mean? What are the investment challenges and opportunities ahead?

Let’s get it straight. Interest rates are going to rise.

No doubt, no mumbling around, they are going to. All the signs are in place.

The suddenness of how swap rates topped the financial news after the September quarter consumer price index jump just shows how game-changing it is.

But you all don’t need to be told. The cost of living in NZ has been going up for ages. Plain and simple; just finally the statistics department has caught up. Long time coming!

The King

Painful as it has been having cash in the bank, chasing not much more than 1%, this is all going to change over the next year. Actually, it is already happening.

What it means is that slowly cash will recover its purchasing power in a relative sense. Whereas in the last few years other asset classes have completed destroyed this store of wealth. Now the books will turn. Don’t expect a mad rush to cash, I am not saying this. What I am saying, as interest rates rise, the saver, the cash hoarder of old (excuse the pun), the one who wants to sleep at night knowing X amount of money is held safely in the bank, he or she will slowly be rewarded more.

This is a good for the retired, beyond other assets in their portfolio.

We will see bank lending rates rise.

These rises will add fuel to the fire on cost of living, but ultimately have some dampening effect in the surge on property prices. It will take a year or two to unfold. The shift may not be immediate but it definitely just around the corner.

We will go from a very jovial, money-is-almost-free mindset to one that more mimics a bit of the past - a past that rewarded savers.

Bond prices will drop with interest rate rises. It will be a slow but consistent turn.

These massive swap rate rises are a material indicator. Material, remember.

As for equities, my favourite subject in the world of investment conversation (remembering still I am only a beginner and fallible like you all) the road to capital growth will be more challenged.

Covid-19 has had many challenges, but with rising costs across the board, then companies exposed to them will have to pass on those costs otherwise profitability is likely to be under threat. You see the domino effect?

This means an investor in equities will need to become even more aware of their portfolio's strengths and weaknesses.

Higher interest rates will mean expectations should be lowered on total and real returns as we head into 2022. Patience and understanding become more important.

Do not become complacent. 

Money earned has suddenly become more valuable. So, the strategy of slowly putting money to work in more potentially volatile investments beyond cash, becomes an even more appropriate strategy. 

In hindsight, the favourable winds of 2020 (after those ugly falls in March, April) will seem a distant memory, a kind of goldilocks, where the gods of free money opened their wallets.

The Challenge

Investing from here into 2022 will be challenging unless you can be very careful and don’t rush. 

Please do your homework, read annual reports and other company material that you can get your hands on.

Companies with the ability to increase dividends will be valued more highly when interest rates rise. Generally the potential for capital growth is less likely, thus those dividends (especially those dividends fully imputed) will be very handy for helping total returns.

Naturally company debt levels will become more a topic of conversation, especially for those companies with short term debt that will need to be refinanced.

Stay Calm

Now I would just like to mention, rising interest rates are not all bad. It will just be the rate that those rates increase, the acceleration so to speak, that will be the challenge.

I am wary though, because markets have got out of kilter a bit as we have had so much government money flushing into the system and now the proverbial has hit the fan with the cost of living finally becoming a constraint on our economy's systems.

The cool thing is though, value will come back. Your dollar will now buy more of the good investment you have identified. And when that investment rises above others, your gains will be multiplied.

Take care, stay focused and stay hunting for those gems.

Tony Morgan has run a portfolio management business and an equity brokerage, both of which were purchased by Craig Investment Partners. He now runs a small family office that invests globally. Other articles in this series can be found here. And the profiles of all the NZX50 companies can be found here.

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Well written article.

While steep interest rates increases in the very near future will definitely play havoc with the NZ housing Ponzi (and many specuvestors have no idea, in their delusional thinking induced by unsustainable ultra-loose monetary policy of the past, about what is going to hit them), this will  separate the men from the boys in the sharemarkets: there are still opportunities, but good investments in this asset class will be harder to find. Having some cash prepared to jump in on significant dips might also be an interesting tactical choice 


This is the season to buy puts and sell calls.


My pick is interest rate rising, but real rates remaining negative for the foreseeable future.


Time to short a few companies that are hanging on because of cheap debt I reckon. 


"Bond prices will drop with interest rate rises. It will be a slow but consistent turn."

They already have, and it hasn't been slow. NZ composite bond indexes are down 6-7% this year, the worst performance in over a decade.


Warren Buffett would love to meet you Tony, then at 91 he could say that he has finally met someone who can predict future interest rates, and even more surprisingly other macroeconomic outcomes. As you know what future Bond prices are going to do, I can only assume you have massive leveraged short positions?

Perhaps you'd care to share with readers your previous correct macro economic calls along with the incorrect (assuming there are any). Specifically point us to interest rate predictions.

Dangerous for to print this article as naive readers may actually believe that Tony knows what the future will bring. He does not. It's one thing for him to say that he thinks, but he says he knows.

Warren Buffett - 'Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future'