US interest rate hike is likely to boost equity markets, highlights new report

5th October 2015


Recent market volatility has rattled investors but the global economy continues to grow and the likelihood of a US rate rise may not be as problematic as many believe, experts have claimed.

Paul Jackson, head of multi-asset research at ETF provider Source, has asserted that he is not overly concerned about the US Federal Reserve raising interest rates, which he believes is likely to happen by the end of the year.

He said: “Our analysis shows that equity markets tend to perform well during Fed tightening cycle especially compared to government and investment grade bonds. What would concern us more would be a dramatic slowdown in the global economy, which current data does not seem to be suggesting.”

Jackson also believes that fears over the economic slowdown taking place in China are exaggerated, with the country’s increased debt being self-financed and much of the bank lending being financed by deposits.

In addition, the People’s Bank of China still has unused policy tools at its disposal. Jackson acknowledged, however, that Chinese economic growth is decelerating but he feels this may have more of an impact on commodities than to global equities and other risk assets.

The group’s report points to the prospects for eurozone and Japanese equities, given that their domestic economies are in the early expansion phase of the cycle, in contrast to the US and UK, which are both much further along.

The report concluded that, in the fixed income space, emerging market bonds may offer the most attractive total returns for the next 12 months, although currencies may weaken further versus the US dollar. “With some of the main EM countries now in recession, this should be an environment in which debt markets benefit,” said Jackson.

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