The high interest rate era ends: it's time to move your money

The topics discussed by a panel of leading experts were the global economic outlook and investment strategy in 2012. Among the many clients and investors I met, the most frequently asked questions went something like “will the interest rate going up or down?”, “will inflation drop soon?” and “for how long should I invest?” Here is my answer.
The recent past saw the world economy grow at a fast and steady pace. Commodity prices have risen sharply since late 2009, and became stable in mid 2011. During that time, everyone expected high inflation due to high commodity prices for oil, gold, food, etc. Central banks around the world therefore increased their policy interest rate to control the inflation. Investors were advised to opt for short-term fixed-income funds (less than six months) and take the opportunity to reinvest at a higher return potential.
However, the story has totally changed since the second quarter this year. Natural disasters such as Japan’s tsunami and the ongoing floods in Thailand have exacerbated problems caused by Europe’s public debt woes. As a result investors are increasingly concerned about a world economy which was already expected to slow down, and could now even enter a global recession.
Views on the interest rate trend over the next 12 months are also significantly changed. The era of high interest rate is at an end, and investment strategy has changed. In TISCO Wealth’s view, two main factors  have brought the end of high interest rates. First, inflation pressure has lowered. World inflation has already peaked, while inflation in Thailand is expected to top out within the next month or two. There are also signs of commodity price consolidation, which will also reduce inflation pressure. Therefore, we expect inflation will decrease significantly from Q4 onwards.
Second, global economic growth has slowed. The European debt crisis will impact the world economy for another six-nine months. Right now, most analysts are revising down their forecasts for global GDP growth and company profits in 2012. US GDP growth is expected to slow to only 1 per cent while Asia’s GDP is expected to reduce by 1-2 per cent on average. Europe is the hardest hit, and some European countries will have negative GDP growth next year.
Therefore, there are no longer any supporting factors for high interest rates. US and European central banks say they will not increase interest rates until late next year. In Asia, although economies are still growing fast, countries are keeping their interest rates unchanged. For Thailand, whatever the Monetary Policy Committee decides at its next meeting on October 19, the policy interest rate is expected to remain stable at 3.50 per cent or 3.75 per cent for at least the next seven to eight months. In the next three to six months most banks will back off from offering interest rates above 4 per cent, preferring to wait and see what the economic situation holds next year.
In conclusion, now is the right time to change your investment strategy and extend fixed-income duration from less than six months to six-12 months. Invest for less than three to four months’ duration, and you may get a lower interest rate when you come to reinvest. Investments of more than 12 months are also not recommended as the world economy may recover later next year.
Risk-averse investors are recommended to opt for deposits, B/Es, or fixed-income mutual funds that mature in six-12 months. Special interest rates of more than 4 per cent are still available in the market.

Picha Ratanatam is head of Wealth Management at TISCO Bank.