For more than a decade after the global financial crisis, investors grew used to near-zero interest rates. Cheap money lifted the price of almost every asset, rewarded borrowing and pushed savers to take more risk in search of income. That era has ended. Central banks raised rates sharply to bring inflation under control, and even as policy eases, the consensus is that rates are unlikely to return to the extraordinary lows of the 2010s.
A world in which rates stay higher for longer changes the rules for building a portfolio. Below we set out what that means in practice, and how we are positioning client portfolios.
Cash and bonds are working again
The most immediate change is that safe assets pay a meaningful return. Cash deposits and short-dated government bonds now offer yields that, for the first time in many years, can keep pace with or exceed inflation. For investors who need stability and liquidity, that is welcome news.
But cash has limits. Its return is not locked in: when central banks cut rates, deposit rates follow quickly. Bonds, by contrast, allow investors to secure today's yields for several years. We believe high-quality bonds of intermediate maturity offer an attractive balance of income and protection, and that they have regained their traditional role as a diversifier against equity market falls.
Valuations matter more
When money is free, investors are willing to pay almost any price for growth that may arrive many years in the future. When money has a cost, that patience runs thinner. In a higher-rate environment, the price paid for an asset becomes a more important driver of future returns.
In equities, this argues for discipline: favouring businesses that generate real cash today, carry manageable debt and can pass rising costs on to customers. Highly leveraged companies face a double challenge, as refinancing their borrowing at higher rates eats directly into profits.
Income is back as a source of return
For much of the low-rate era, returns came mainly from rising prices. Today, income can do more of the heavy lifting, whether from bond coupons, equity dividends or rental income from well-let property. A portfolio built around reliable income tends to be more resilient, because it depends less on market sentiment to deliver results.
Real assets need careful selection
Property and infrastructure were among the biggest beneficiaries of falling rates, and among the hardest hit when rates rose. After a period of repricing, selective opportunities have emerged, but the margin for error is thinner. Assets with strong tenants, inflation-linked income and sensible levels of debt are best placed. Those that relied on cheap borrowing to make the numbers work are not.
How we are positioning portfolios
- Locking in yield with high-quality bonds rather than relying solely on cash.
- Favouring quality in equities: strong balance sheets, consistent cash flow and pricing power.
- Emphasising income as a core, dependable component of total return.
- Being selective in real assets, focusing on income quality and conservative financing.
- Staying diversified, since the path of rates remains uncertain and surprises can come from either direction.
The bottom line
Higher rates are not something to fear. They restore a cost to capital, reward savers and reintroduce discipline to markets. For long-term investors, they offer the chance to build portfolios that earn a genuine return from income while paying sensible prices for growth. The investors who adapt will be well placed. Those who wait for the old era to return may be waiting a long time.
This article is for general information only and does not constitute investment, tax or legal advice. The value of investments can fall as well as rise and you may get back less than you invest. Please seek personalised advice before making any financial decision.