Investors should prepare “to take advantage of the fallout” from US Federal Reserve’s inevitable rate rise

16th April 2015

Investors should prepare a defensive portfolio and to be ready to take advantage of the imminent significant opportunities that will likely present themselves writes Tom Elliott international investment strategist at independent financial advisory firm deVere Group…

The IMF’s Economic Outlook predicts 3.5 per cent global GDP growth this year.  Many economists believe 3 per cent is on the cold side, whilst 4 per cent is a little hot, so the IMF’s forecast at half way between the two is at first glance reassuring. But there is a sting in the tail, which is when they discuss risks to this scenario.

The report warns of a key risk being a ‘cascade of disruptive adjustments’ once the US Federal Reserve finally begins raising interest rates, and it becomes harder and more expensive to take out new debt and to roll over existing loans. A wave of defaults, bankruptcies and, at worst, another round of bank insolvencies may follow.

As such, investors should be ensuring they have a diversified portfolio, preferably holding some cash and avoiding long duration bonds and – if possible – exposure to banks. Having prepared a defensive portfolio, investors should, typically, sit tight if there is a market sell-off. Invariably markets recover, while there is a significant risk of missing this if a portfolio has been liquidated.

Indeed, it is likely that there will be significant opportunities ahead. Investors should be able to benefit from any sell-off through buying bonds and equities at cheaper prices, thanks to the effect of ‘pound cost averaging.’ The shifting dynamics must be monitored carefully to be able to benefit from the opportunities that will present themselves and to mitigate the avoidable risks.


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