A leading investment analyst has urged investors to ‘Keep Calm and Carry On’ as the day for UK and U.S interest rates being raised draws nearer.
This message comes from Tom Elliot, International Investment Strategist at deVere Group, in reply to the Bank of England Governor's comment last week that “the economy has edged closer to the point at which the Bank Rate will gradually need to rise”; and as Janet Yellen, Chair of the Federal Reserve, faces considerable pressure to hike up U.S interest rates.
“If current UK and U.S. macro-economic conditions persist, I am looking for the Bank of England to start raising interest rates towards the end of this year or early 2015, and for the Fed to start in mid-2015,” Elliot says. “Thereafter, I expect a slow but steady increase in rates to around 2 to 3 per cent over a multi-year period.”
With this in mind, how should investors respond to a rise in interest rates over the next 18 months? “Probably with more equanimity than some doom-mongering market commentators are suggesting,” Elliot advises. “This is because interest rates will rise only slowly, with the central banks at liberty to stop, or reverse the process, should economic growth suffer.”
The anticipated rates rise is seemingly imminent, with Elliot observing that ‘global fixed income is most vulnerable, while credit has an additional liquidity problem.” He argues that global equities may still make gains as they benefit from ongoing demand growth in the Anglo-Saxon economies, further monetary easing by the ECB, and growing confidence that China's debt mountain can be reduced without an ‘economic hard landing’.
“However, highly leveraged industries, such as banks, and high yielding income stocks do appear vulnerable as dollar rates rise,” Elliot adds. “I expect the dollar to appreciate and emerging market currencies linked to large current account deficits to come under stress.”
The analyst from the deVere Group, which has $10bn under its advice, finishes by saying: “Implications for asset allocation investors should remain at full weight in equities, whilst allocating a portion of their fixed income to dollar cash or very short term paper. In short, 'Keep Calm and Carry On'.”