Now is the time to start cushioning your investments from an interest rate hike, warns the U.S. boss of one of the world's largest independent financial advisory organizations.
Continuing weak inflation data suggests that the June hike, that the markets are bracing themselves for, may be postponed until later in the year. What is not in dispute is that investors need to prepare themselves for further U.S. interest rate hikes.
The warning from Benjamin Alderson, senior area manager of deVere USA Inc., part of deVere Group, which has $10 billion under advice, comes as the minutes from the Federal Reserve's latest meeting shows that 'most participants' said that it would be 'appropriate' to raise rates in June, if the economy continues to improve.
Mr Alderson observes: 'An impending rate hike is being indicated by many Fed dignitaries. They are — with the notable exception of the Chair, Janet Yellen — talking it up, carefully setting out the case, and almost seeking permission from the markets to do so.
'We know a hike is on its way. But I believe that the tighter monetary conditions created by the speculation of a June hike – notably a rally in the dollar - means that an increase in the rate in September or December is more likely.'
He continues: 'The recent flurry of excitement surrounding an imminent rate hike has been caused by the stronger than expected April inflation data. However, wider economic data has not been robust this year, with wage growth remaining modest and April headline CPI well below the Fed's 2 per cent target. April's core inflation — excluding erratic items such as energy — was slightly above the Fed's 2 per cent target, central banks tend to pay less attention to it as a valid indicator of domestic inflationary pressure. This, together with a 3.5 per cent rise in the dollar's trade weighted value since May 2, all argues for a delay in the next Fed rate hike, until there is more evidence of an impending inflation problem.'
He goes on to say: 'If we get a rate hike in June the dollar will rise further, hurting U.S. exports. And without more convincing evidence of a tighter labor market triggering a wage inflation problem, equity and credit markets will fall as U.S. borrowing rates go up, and once again we will have fears that the Fed is determined to 'normalize' interest rates almost irrespective of the effect on the economy. The Fed will want to avoid such a scenario.'
Mr Alderson affirms: 'Nevertheless, the Fed does appear keen to 'normalize' interest rates and even a hike later his year risks being premature if domestic inflationary pressures remain weak. Now is the time to start cushioning investment portfolios.
'Investors should be seeking a safe haven by having an appropriately balanced portfolio, which perhaps includes increasing their exposure to long dated Treasuries and other core government bond markets. The price of long duration bonds will be better protected if the Fed raises rates while inflation is still weak, since it is inflation that does most to destroy the real value of the coupons and the capital repayment.
'In addition, they should consider increasing exposure to stock markets in Europe and Japan as their exports will become more competitive as their currencies fall against the dollar.'
Mr Alderson concludes: 'Investors need to ensure they are ahead of the game to mitigate the risks and maximise the important opportunities.'
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deVere Group is one of the world's largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients. It has a network of more than 70 offices across the world.
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