Interest rates play a crucial role in shaping the economy. When inflation is high, central banks often raise interest rates to make borrowing more expensive and saving more appealing. This helps slow down spending and cools demand, which keeps inflation under control.
We saw this play out in 2022, when central banks around the world, including the US Federal Reserve, increased interest rates in response to soaring inflation and global supply chain disruptions caused by the Covid-19 pandemic.
Since then, inflation has been coming down, thanks to tighter monetary policies, improved supply chains, and more stable energy prices. As a result, central banks no longer need to keep interest rates high. So, many have started gradually reducing rates to support economic growth, make borrowing more affordable, and encourage spending and investment.
But while falling interest rates can give the economy a boost, they’re not great news for your savings and fixed deposits as it means your money isn’t growing as much. But don’t worry. This could just be your chance to level up financially!
Certain investment products tend to perform better than others when interest rates are low – you just need to know where to park your cash. Here are some options to consider.
1. Stocks
When interest rates are low, borrowing becomes cheaper, which makes it easier for companies to take out loans and access funding. This gives them an opportunity to grow, whether it is to expand their operations, launch new products, or boost their marketing efforts.
At the same time, lower interest rates often happen when inflation is easing, which means people have more money to spend. More consumer spending leads to higher sales, stronger profits, and ultimately, rising stock prices. As companies become more profitable, investor confidence tends to rise too. And when confidence is high, stock prices often go up.
Low interest rates also make savings accounts and bonds less attractive since their returns drop, so many investors start shifting their money into stocks for better long-term growth. Even companies that don’t rely heavily on borrowing benefit from increased consumer spending and overall optimism in the market.
If you’re thinking about getting into stocks for the first time, remember that short-term ups and downs are completely normal. Stocks are best suited for long-term goals because they give your investment time to grow and recover from any dips along the way.
A smart place to start is with companies you’re already familiar with, like those in tech, consumer goods, or even energy and commodities. Since you are already familiar with their products or services, it's easier to understand how they make money. But don’t just buy what you like – dig deeper to see if the stock is fairly priced and whether the company is financially strong now and if they are likely to stay that way in the future.
If you are looking to earn some regular income while your investment grows, consider dividend-paying stocks. These offer payouts along the way, plus the potential for long-term growth.
2. Real Estate and REITS
When interest rates are low, housing loans and mortgages become more affordable, making it easier to invest in property. But investing in property isn’t just about the purchase price. So, remember to factor in monthly repayments, maintenance fees, taxes, insurance, and potential renovation costs before buying. These extra expenses can add up, so it’s important to plan carefully.
If buying a property feels like too big of a commitment, Real Estate Investment Trusts (REITs) are another alternative. REITs are companies that own, manage and finance income-producing properties like malls, offices and apartments. You can buy shares of a REIT company, just like how you would with a stock. Investing in REITs allows you to invest in real estate without actually owning physical property. So, you get to earn a share of the rental income without all the hassle of managing the physical property yourself.
3. Exchange-Traded Funds (ETFs)
As mentioned earlier, stocks and real estate often do well when interest rates are low. And one of the easiest ways to invest in both of these at once is through ETFs.
Think of ETFs as baskets that hold a mix of different investments in one place. By buying just one ETF, you get exposure to the performance of multiple assets without the hassle of picking individual stocks or needing a large amount of capital. Having this diversification makes ETFs especially appealing in a low-interest-rate environment.
With ongoing global uncertainties, it is likely that this won’t be the last time that we see interest rates fall. When it does happen, don’t view it as a setback but as an opportunity to diversify your investments, explore different asset classes, and build a more resilient portfolio that helps you manage risk more effectively.
