All assets are somewhat tied to the fate of interest rates in Australia and in the USA. There's no getting away from the fact that most assets are measured against the 10-year Treasury yield, such as all the bonds on the market.
The problem facing all investors is that the Federal Reserve is expected to keep increasing the interest rate over the next couple of years. It makes sense for the US to do it because the employment rate is so low and expected to get lower.
Not only is this expected to hit all assets in some way, it's going to hurt some stocks hard in-particular.
Supposedly, when investors couldn't get the yield they wanted at the bank they moved into 'safe' shares that offered a higher yield. Some of the main ones in Australia are shares like Transurban Group (ASX: TCL), Sydney Airport Holdings Ltd (ASX: SYD) and APA Group (ASX: APA). Essentially, defensive stocks such as infrastructure businesses are in danger.
The threat is that as rates rise investors will sell out of these stocks more heavily than compared to the rest of the market.
So, how do you avoid the 'bondcano'?
Of course, the answer is not to sell everything and stick the cash under the mattress forever. Shares have proven to outperform all other asset classes over the ultra-long-term.
I think the answer is to invest in growth shares that are growing at a fast enough rate that will compensate for the negative effect of the rising rates.
The problem is that the best growth stocks are trading at very high levels. Altium Limited (ASX: ALU) and a2 Milk Company Ltd (ASX: A2M) are two of the best yet are both trading at all-time highs. Perhaps a currently-unloved growth story like BWX Limited (ASX: BWX) could be the answer?
Foolish takeaway
Investors need to be as careful as they can be when investing over the next couple of years, holding cash in the short-term is not a bad option if it means you have some ammunition to buy shares when they go on sale. I think it's important to remember that the long-term average return of 10% per annum for shares includes the bad years too, like the GFC.
