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US and the rest – what’s happening to the markets?

11 October 2018

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Global markets have fallen for the last few days as worries over rising interest rates in the US come to the fore. Interest rates usually have a negative correlation with stock market prices. As interest rates rise, share prices usually fall, and vice versa.

The US has been raising rates for 2 years now, with the latest rise a couple of weeks ago, making 8 so far. Another is expected in December.

Here’s what our experts think. Remember this article isn’t personal advice. If you’re not sure if an investment is right for you, you can ask us for advice.

More of an October Storm

Mark Dampier, Head of Research

The last Federal Reserve statement suggested further rate rises in 2019, possibly 4. It’s affected US Government bonds (US Treasuries), with the benchmark 10-year bond yield rising to 3.2%.

This has now affected the US stock market, as shares prices take into account the ‘risk-free’ rate of return from bonds. As bond yields rise, equities (shares), look more expensive, so we’ve seen them pulled back in line. The US usually leads global markets, so we’ve seen other stock markets follow suit.

In the US in particular areas of high growth, like the technology sector, have been off in a tear for some time. They’ve been ripe for profit taking as valuations of these stocks have risen. This has rippled into growth stocks worldwide. And people take profits from their investments the biggest risers usually take the biggest hits.

But I think this is more of an October storm.

I don’t think the Fed will hike interest rates 4 times in 2019. Indeed, they might not raise them at all.

Looking at the US economy, there’s been a big sugar rush with tax cuts. But if the economy is so strong, why are house building starts and car sales so weak? I suspect the economy isn’t quite as strong as other commentators seem to think. As such, I don’t think bond yields in the US will rise much further from here.

Strong dollar hurting emerging markets

Nicholas Hyett, Equity Analyst

One side effect of rising US interest rates has been a significant strengthening of the US dollar in the second half of 2018. While that’s good news for companies like Ashtead and Ferguson, who make most of their sales in the US, it’s less helpful for companies that operate in emerging markets.

Lots of emerging economies issue debt in dollars, and a strong dollar makes that debt more expensive. With governments under pressure, emerging market currencies have weakened.

Add growing trade tensions between the US and China and, a crack-down on Chinese corruption denting demand for luxury goods, and it’s been a less than pleasant time for companies like Burberry and Louis-Vuitton Moet Hennessy with exposure to the emerging world.

What should investors be thinking about?

Mark Dampier

Underlying the falls, we’re seeing a big rotation out of so called ‘growth stocks’ into more lowly valued shares that respond better to rising bond yields.

We always suggest that clients need different types of funds in a portfolio. And falls in the market have made the unfashionable equity income sector look better and better value, with yields over 4%. You are being paid to be patient, although they aren’t guaranteed.

As ever, it’s not a time to panic. Falls bring opportunities, and that’s how I’ll be looking at the markets.

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    No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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