Market Update - Impact of Falling Interest Rates
Interest Rates Are Falling – What It Means for Investors
After years of rising interest rates and market turbulence, there are signs we are entering a new chapter. In some parts of the world, rates have stopped climbing, and in others, they are beginning to fall.
That shift has big implications for both bond and share investors.
A More Positive Outlook for Bonds If You Are Selective
Bond markets are starting to look more attractive, particularly in regions like New Zealand and the UK. With inflation easing and central banks signalling rate cuts, there is now a growing margin of safety in these markets. If interest rates fall, bond values can rise, and that creates opportunity.
We are becoming increasingly optimistic about bonds, especially when investors are selective about what they own. This is not the time to blindly load up on broad passive bond funds. In the US, for example, aggressive rate cuts could potentially reignite inflation. That means you need to pick your spots. It is a bond picker's market, and good decisions here can make a real difference.
Shares Benefit Too – But Valuation Risk Is Real
Falling interest rates are generally supportive for equities. Lower borrowing costs help businesses grow, and investors tend to rotate into growth assets. That is a meaningful tailwind. But we have to weigh that against valuation risk. In some markets, particularly the US, prices are already elevated. A small handful of mega cap tech companies now make up almost 40 percent of the S&P 500 index. That creates risk, and when markets are priced for perfection, any surprise in earnings, inflation, or geopolitics can lead to sharp pullbacks.
So while we see reasons to be cautiously optimistic about shares, the smarter approach is to:
Stay invested. Trying to time the market rarely works
Tilt towards value stocks rather than chasing high momentum growth
Diversify globally, especially in countries like New Zealand and Australia that may offer better relative value
Avoid overexposure to a handful of overvalued names
The Bottom Line: Stay Invested – But Reduce Valuation Risk Where You Can
Right now, there are reasons to feel positive, if you can take some steps to reduce valuation risk.
You do not need to make extreme portfolio changes. But you should review your exposure to valuation risk, and where you may be relying on yesterday’s winners to continue outperforming.
At Windsor Wealth, our Defensive Investing philosophy is about managing downside risk first and letting the upside take care of itself. We believe this creates a natural margin of safety, delivering better long-term returns while also helping clients sleep at night.
Right now, that approach means staying invested, avoiding unnecessary concentration in one country or sector, and tilting portfolios toward better value and lower risk, without trying to time the market or bet on what comes next.
No hype. No fear. Just intelligent, evidence based investing built for the real world.