The global easing cycle from central banks has continued, raising the appeal of borrowing strategies.
- Evidence of a weakening US labor market led the Fed to cut rates by 25bps in both September and October, with further reductions likely.
- The Swiss National Bank has brought its policy rate down to zero.
- The European Central Bank has cut its deposit rate eight times in total since June 2024, bringing it to 2%.
Against this backdrop, prudent borrowing can play multiple roles that support financial goals.
- It may provide immediate funds without selling assets, avoiding taxable gains and transaction costs.
- Investors looking to fund new private market investments may find it more efficient to borrow against diversified bond portfolios rather than hold excess cash to meet capital calls.
- Borrowing to invest can yield higher long-term returns if expected returns exceed borrowing costs.
With the right risk management, borrowing strategies may grow in appeal this year.
- Borrowing comes with risks that investors must be willing and able to bear. Investors should compare loan interest rates with expected returns; if returns are lower, borrowing may not be viable.
- A borrowing strategy's robustness must be assessed against market risks and spending plans. Key factors in choosing a borrowing strategy include loan duration, refinancing potential, and interest rate expectations.
New this week
Switzerland’s inflation rate has slowed to near zero, with consumer prices rising just 0.1% annually in October (versus 0.2% in September and expectations for a reading of 0.3%).
Did you know?
- Historical analysis, while no guarantee of future performance, suggests borrowing to invest in diversified portfolios may bear fruit. CIO analysis of 24-month rolling returns for a 60/40 portfolio of US stocks (S&P 500) and US government bonds between 1998 and August 2024 finds such a portfolio would have generated returns ahead of US dollar borrowing costs on nearly 75% of occasions (and by an average 3.4% each year).
Investment view
We believe a falling-rate environment may accommodate proactive borrowing approaches, with judicious use of debt as a tool for achieving financial goals. By leveraging debt wisely, investors have the potential to enhance portfolios, manage risks, and improve the likelihood of achieving long-term financial goals.
