Stock markets are reacting well to strong hints from the US Federal Reserve that interest rates are soon to rise – perhaps before the end of the year.
In recent years, volatile markets have swung wildly on the weakest pretext, but in recent days, markets in the US and UK have reacted well to expected increase rate rises in the near future.
However analyst Russ Koesterich at fund managers BlackRock expects rate rises to be little over a long period so markets are not spooked.
“Rates rising in the US, probably followed by those in the UK, while they are static or falling everywhere else has implications for the world economy,” he said.
“The suggestion is the dollar and the pound will grow stronger, stressing the prices of commodities like precious metals.”
Momentum companies warning
Koesterich warns that although stocks have risen, several factors are holding back more gains, such as high valuations, a lack of growth and worsening credit availability.
“BlackRock likes companies with high returns on investment, steady earnings and low borrowings,” he said. “Over recent months, these companies have performed better than companies that have shown rapid growth.
“Momentum companies have carried the market for some time, but these companies are finding harder times with the volatile markets we have seen of late.”
The company has also looked at the economic data coming out of the US and warns against reacting too harshly to a single number and cautioning taking a wider view of the economy is better.
Economic divergence
“The data is mixed,” said Koesterich. “But the economy is still performing well and more stable international markets are encouraging the US Fed to put up interest rates. We might even see this in December.
“Meanwhile, rates are falling in many other major developed economies, even though the UK is likely to follow suit with the US Fed sooner rather than later.
“We’re seeing divergence in economic and monetary policy and this is going to creep into interest rates.”
Lastly, Koesterich urged investors to hedge against currency fluctuation as the dollar and pound grow stronger as their rising values will impact on the value of foreign stock earnings.
