Rising Interest Rates and Investment Strategy – Strategic Series # 1

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Published on 24 September 2013


Key Messages:


Financial markets got into a new phase

1. Long term interest rates are rising, anticipating an inflection of the US monetary policy

2. USD is strengthening

3. Equity market keeps appreciating

4. The main driver will be the EPS growth, the valuation effect is losing momentum but remains positive

5. Rotation towards the assets that are the most sensitive to the economic cycle, exit from the safe havens/ bond proxies


Inflection of the FED policy

1. The Fed announced on May 22nd the upcoming Tapering of the QE

2. This marks a first sign of monetary policy inflection after a long period of very accommodative monetary conditions (Fed Funds Rates at 0.25% for 55 months)

3. The Fed recalls an upward revision of growth outlook for 2014, a reduction of the risks of a lower economic activity and an improvement of the employment

4. The Tapering should start by the end of 2013 and the first Fed Funds Rate hikes would not start before 2016

5. The Fed remains very pragmatic and the normalization process will be progressive: the pace of the Tapering will be « data dependent » and « fine tuning » will be favored


First lessons

1. Monetary policy tightening phases are always associated with higher volatility

2. Assets inflated by the successive QE become vulnerable (precious metals, emerging debt, carry trades on high yield currencies, real estate)

3. Three great rotations themes will set up: from Bonds to Equities, from Defensive to Cyclical assets, from Consumers to Producers

4. The Fed watching will become the main focus of investors


What investment strategy should we adopt

1. Dollar is getting back on an upward trend after ten years of continuing depreciation. This weakens precious metals and emerging currencies

2. The focus should be on the equity asset class, particularly during the phase where long-term interest rates rise because of building expectations of monetary policy change

3. The current phase sees a rotation from Bonds toward Equities

4. Within Equities, Cyclical/Value sectors and Financial Sector should now be favored

5. As long as there is no effective Fed Funds Rate hikes, a rise in Stocks can coexist with a fall in bond market