28.Jan .2022 23:30

Investing in a Rising Interest Rate Environment

Investing in a Rising Interest Rate Environment
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If we think of a portfolio in a broad sense, as capital that is saved or invested for a future purpose. 
 
Investing is also directly linked to the time value of money, the notion that a dollar today is worth more than a dollar tomorrow. Investing is really about moving economic value across time and different interest rate cycles. 
 
On January 26th, Jerome Hayden Powell, and the Federal Open Market Committee reaffirmed its "Statement on Longer-Run Goals and Monetary Policy Strategy".
 
The U.S stock market is vulnerable to higher rates and the removal of the tailwind that the Fed’s asset purchases have provided for the past few years. As of January 27th, the broad U.S equity market benchmark S&P500 index closed at 4,326 below the 200-day MA (moving average) yearly trendline, (potentially) suggesting the multiyear uptrend could be at risk. 
 
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” The euphoria stage usually coincides when financial markets are priced for perfection and before the interest rate cycle turns. 
 
One key variable impacting all investment portfolios is interest rates in the world’s reserve currency, the U.S. dollar. 
 
The trillion-dollar question for every investor is whether the US equity market could end its multi-year bull market this year. The markets got hooked on the idea that the so-called FED put would be in place forever and that equities will always be a buy on dips. 
 
On the front of the U.S. paper money is the promise” this note is legal tender for all debts, public and private” and on the back is the statement “in God we Trust”. In fact, every investor is really trusting the U.S. Treasury and the Federal Reserve to make good on this promise. 
 
When unelected policymakers throw that much cash into the world economy through quantitative easing, through record low-interest rates for such a prolonged period of time it distorted valuation and securities markets as complex systems based on the pricing of interest rates. 
 
Once there is a built-up of an enormous amount of cash that is sitting in the world economy. The global inflation problem needs to be addressed by higher U.S. interest rates. 
 
Wall Street analysts and investment strategy departments are now contemplating how to position investment strategy after Federal Reserve Chair Jerome Powell set the stage for raising interest rates to combat the highest inflation since 1982.
 
Markets are living in a quantum reality where multiple things can happen simultaneously. 
 
It is a world where there's incredible recovery going on and some people are experiencing the worst losses of their lifetime due to inflation impacting broader parts of society. This can happen at the same time. We are in a world where we're effectively entering a new kind of military conflict over Ukraine and a global pandemic, and financial markets go up, further widening the wealth gap. The Republic of Kazakhstan had relative political stability for over 30 years, yet it took inflationary pressures to unleash political discontent and riots. 
 
Wall Street analysts might ask Where is the new quantitative easing? Défense spending could be the answer depending on how geopolitical trends develop. 
 
Post the fed announcement to consider raising U.S interest rates as early as March 2022, initial price action and portfolio re-balancing benefited from the rotation out of expensively priced for perfection stocks and into cheaper lower P/E markets. “value overgrowth” increasingly is the new market narrative and post FED “consensus view”. 
 
Investors should focus on quality at a reasonable price and avoid very expensive parts of the market. 
 
Changing Fed expectations are exposing long-duration assets with high valuations focusing on profitability should be increasingly valuable as interest rates continue to rise.
 
Fed interest rate hikes, for now, mean not much for earnings. Only thing is that earning season and corporate guidance becomes even more relevant, and hence more medium volatility 
 
Stocks that can deliver on growth to offset the impact of higher rates most likely will be favored by the market. 
 
The better monetary backdrop in Asia could overall support Asian equities inflation-adjusted (real) rates will likely remain negative in 2022, enabling equity investors to discount record profits, growing at slightly better than historically average rates, near historic lows. 
 
Rainer Michael Preiss serves as an investment advisor & portfolio strategist.