Financial Newswire Contributor

11 November 2022

A rising interest rate environment is prompting a rethink of income approaches. But market volatility and persistent inflation mean investors still need a broad income toolkit.  

The decade-plus period of extremely low interest rates that followed the financial crisis left traditional sources of income such as bank deposit accounts and developed market government bonds paying low or no income. Savers and investors became very used to an environment in which income was hard to find – and often negative in real terms.

Many savers became income investors, and many investors moved further up the risk spectrum into extended fixed income sectors such as high yield and emerging market debt. Central bank support and the widespread appetite for income cushioned some of the risk and led to strong performance.

Today, the income environment has changed. The combination of supply-chain bottlenecks and labour shortages following the pandemic with the energy crisis resulting from the conflict in Ukraine has resulted in persistently high inflation, forcing central banks globally to embark on rapid rate-raising cycles.

Higher interest rates are bad news for borrowers, but may be welcomed by those in search of income. However, with inflation continuing to erode the value of cash, investors may need to maintain the broader income toolkits they developed in the long period of ultra-low rates.

The rise in yields has put government bonds back in focus for income investors, but aggressive central bank tightening to combat inflation at multi-decade highs has generated significant volatility in an asset class often sought for its stability. Meanwhile, yields that are rising in response to higher inflation and higher interest rates are a double-edged sword. Adjusted for inflation, yields are still largely negative around the world.

Other areas of the market may be more fruitful. US investment grade credit has historically delivered positive returns in challenging markets as high-quality companies with strong balance sheets continue to be able to service their debt.

Further out on the risk spectrum as a part of an overall portfolio, US corporate high yield may offer selected opportunities for long-term investors who are able to ride out short-term price fluctuations. Broadly, fundamentals are strong, and any US recession is currently expected to be short and shallow, meaning there is scope to use a right-sized position to enhance portfolio yield.

Meanwhile, dividend-paying equities are often viewed as an attractive income solution in rising rate environments. Over the long term, companies can pass rising costs on to their customers in the form of higher prices, protecting their revenue and earnings streams from inflation.

In addition, although dividends from equities are not guaranteed, they can be a useful portfolio cushion when share prices are falling. For investors who can take on additional risk and ride out the current volatility, equities could therefore be a useful part of an income portfolio.

The actively managed JPMorgan Equity Premium Income ETF (JEPI) pursues opportunities for consistent monthly income and appreciation, with lower volatility than the U.S. stock market.

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The information is general in nature and does not take into account any specific investor’s objectives or circumstance. Provided to illustrate macro trends and JPMAM’s income investing capabilities. Returns, income or dividends are not guaranteed. The manager seeks to achieve its stated objectives, there is no guarantee they will be met. Forecasts and estimates may or may not come to pass. Investments involve risks and are not similar or comparable to deposits. Not all investments are suitable for all investors. Before making any decision, it is important for you to consider the appropriateness of the information and seek appropriate legal, tax, and other professional advice. Prior to making an investment decision, investors should read the relevant Product Disclosure Statement and Target Market Determination, which have been issued by Perpetual Trust Services Limited, ABN 48 000 142 049, AFSL 236648, as the responsible entity of the fund available on https://am.jpmorgan.com/au.