The last 40 years in financial markets have been heavily influenced by a very important factor: falling interest rates. A look at the 10-year US bond yield shows that it peaked in '81 at around 16%, and since then it's been moving steadily lower, marching inevitably towards zero. Paul Moore, founder and Chief Investment Officer at PM Capital, believes this trend has now passed an inflection point. Rates have bottomed in the US and Europe, and inflation might not be as far away as many expect.
"You're slowly seeing the conditions put in place for inflation to be underpinned. Every central bank wants to create inflation. Ultimately, they'll get what they asked for. They might not want it when they finally get it, but they will get it."
He says that this trend will have far reaching implications across all asset markets, but for equity investors it means that the types of investments that have worked well in the past, won't in the future. And likewise, some investments that have been out of favour, could be due for a comeback.
Tune in to the latest episode of The Rules of Investing, presented by Livewire Markets, to hear his take on which assets are set to benefit and which will suffer.
- 2:08 – Paul’s career beginnings - The golden era at BT and stories from that time
4:33 – Financial crashes and the lessons taken from them
- 8:54 – Value vs. growth: valuation disparities and timing the market
12:46 – The most challenging investment in his career
- 18:28 – A bottom up and investment thematic approach
- 22:11 – The investment theme that will dominate the coming decades
- 26:43 – The reason for LICs’ discount in Australia
- 31:53 – Why he doesn’t own US tech megacaps
- 35:39 – A recent investment PM Capital has made
- 39:38 – Paul answers our ‘Three favourite questions’
Discussed in the podcast
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The idea that interest rates are going to rise is fanciful. Sure they may tick up from time to time but the long term trend is clear, rates are falling world wide. They have been doing so for 35-40 years and will probably continue to do so for the next 35-40 years. Things don’t happen for 40 years without a reason and the reason is simple … there are strong underlying social, economic and technological trends that have been driving interest rates down over the long run. Furthermore, the idea that central banks actually control interest rates is also fanciful. Interest rates are set by the market, just like the cart does not push the horse, so to the RBA or Fed does not set interest rates, they simply respond to what the market is doing. The market has low inflation, the RBA responds by cutting. Hence it is the market that really lowers the interest rate, the RBA being the cart is simply being pulled along by the horse.