After the turnaround in interest rates – a new world for savers and investors?

Interest rates have risen rapidly since the beginning of 2022. And so savings deposits and fixed-income securities are earning interest again. But how lucrative is that really? And how do investors position themselves correctly in this environment?

The turnaround in interest rates came suddenly and went quickly. Between July 2022 and March 2023, the European Central Bank Raised interest rates from zero to 3.5 percent. The positive result from the savers’ point of view: there is interest on savings and on fixed-income securities again. If you search, you will find, for example, fixed-term deposits that have an interest rate of three percent or more.

“The only catch is that the inflation rate is still seven to eight percent,” says Rainer Laborenz from Azemos Vermögensmanagement GmbH in Offenburg. “And that means that we still have a negative real interest rate of four to five percent.” The result is massive real losses in the value of bank deposits.

Interest is below the rate of inflation

The same problem exists with fixed income securities. It is true that safe federal bonds – after years of zero interest rates – are again offering between two and three percent. Thomas Neumann from bestadvice Vermögenstreuhand GmbH in Munich also advises against it. “Firstly, the interest rates on safe government and corporate bonds from the euro area are below the inflation rate and secondly, the risks sometimes outweigh the opportunities with these investments,” he says.

If at all, according to the experts, interest investments are only suitable for parking money in the short term. “I would choose shorter-dated, very safe bonds for this, since these show lower price losses if interest rates continue to rise,” says Laborenz. If the interest rate cycle turns around again at some point, then bonds offer an advantage over bank deposits: “In this case, they bring additional price gains.”

Thomas Neumann uses another alternative for parking money: “For example, we invest via ETFs in foreign currency bonds from secure debtors such as Singapore, Switzerland or Norway in order to better diversify on the currency side compared to the euro,” he says.

Shares as an investment with no alternative?

On the other hand, in order to maintain the chance of real capital preservation, there is no way around tangible assets such as shares. “Investors need to be aware of stock price fluctuations, but over the long term, over at least five to seven years, this evens out and they offer the chance of real capital preservation and, well-chosen, an increase in return after inflation,” summarizes Neumann.

He focuses on high-quality and valuable titles, so-called The Value Sharesmall caps and the theme sustainability. “And we use it for that Exchange Traded Fundsas they are significantly cheaper than actively managed funds and the latter have been shown to often not outperform the index,” he says.

Rainer Laborenz advises also to pay attention to the pricing power of companies when selecting individual stocks. “Because only these companies are really able to pass on increased prices to their customers and to develop well in an inflationary environment,” he says. He also thinks precious metals are a worthwhile addition, as they tend to do well in an inflationary environment and can offer protection in times of crisis.

Align your portfolio with your own investment goals

Regardless of the environment, it is also important to regularly check whether the portfolio allocation still fits with your own investment goals and personal situation. “In this context, we also recommend rebalancing, restoring the original portfolio allocation, once a year,” says Neumann.

In fact, compared to the time before the turnaround in interest rates, not that much seems to have changed for investors. “One major difference is that inflation is now much more visible and people are more aware of the real loss of purchasing power in nominal assets such as bank deposits or bonds,” Neumann concludes.

Author: Gerd Huebner