Inflationary pressures from president-elect Donald Trump policies could mean the US Federal Reserve is already behind the curve and a market reaction to a rate hike could be muted, fund managers say.
They list emerging markets and bond proxies as potential losers from today’s decision, while REITs and banks could benefit.
The FOMC meeting is the first since the US election when Republican nominee surprised pollsters and markets by winning the electoral college vote to cinch the presidency.
A rate hike is considered a near certainty at today’s meeting.
David Osfield, manager of the EdenTree Amity International fund, says unemployment data bodes well for the market being able to absorb an accelerated hike, but questions whether it is behind the curve given inflationary measures being created by Trump’s fiscal and infrastructure spending policies.
“Investors should keep a close eye on the housing market, the key bellwether of the US economy.
“More selectively, banking stocks are likely to see improved profitability from lending as net interest margins improve.”
Tom Carroll, investment director at Sanlam FOUR, says a rate hike is “in the price” and expects market reaction to be limited to a rate hike.
Treasury yields are up 100 basis points since July, Carroll points out.
While he questions how much of the Trump election manifesto will be implemented, Carroll still expects equity investors to be optimistic early into 2017, based on a pick up in inflation, stronger growth and a normalisation of monetary policy.
“A further shift upwards in bond yields is possible and this is likely to put further pressure on parts of the equity market that have led performance over the past few years – in particular the expensive consumer staples and other bond proxies.”
Emerging markets debt will suffer if the greenback rises on an accelerated US rate cycle, which will have a detrimental knock-on effect for equities as capital flows unwind, Osfield says.
But he adds: “We continue to see attractive long-term opportunities in EMs, but these are in the structural and sustainable growth areas within the emerging world, rather than pure yield plays.”
“For out-of-favour emerging markets (EMs) the main tightening issue is normally the greenback rather than rates. However, an accelerated US rate cycle will make the risk premium on EM debt less attractive, and higher US rates will also mean any outstanding dollar-denominated debt becomes more expensive to service. This tends to have a detrimental knock-on effect on EM equities, as capital flows unwind. However, we continue to see attractive long-term opportunities in EMs, but these are in the structural and sustainable growth areas within the emerging world, rather than pure yield plays.”
Within real estate, Thomas Bohjalian, executive vice president at Cohen & Steers, says REITs have historically performed well in periods of rising yields, as these periods are generally characterised by accelerating economic growth.
“Looking at the past 20 years, there have been seven periods in which 10-year treasury rates experienced a sustained rise of 50+ basis points over a period of one year or more.
“REITs had positive returns in six of those periods, and they outperformed the S&P 500 in five.”