Two sectors in particular are likely to under perform as US interest rates rise, according to Susan Bao, who jointly runs the £198m JP Morgan US Select fund.
Ms Bao said while the US market is not as cheap now as it was nine years ago when the present bull market began and economic indicators and earnings forecasts point to a recession being several years away.
Her view is the US won’t enter a recession before 2020 and that the bull market is unlikely to end unless the economy contracts.
In the current environment of rising interest rates, Ms Lao those equities whose fate is most closely linked to the movements of the bond market are likely to suffer.
She said Real Estate Investment Trusts (Reits), which are listed property funds, are likely to suffer in an environment of rising interest rates.
This is because when interest rates and bond yields are low, the income generated by a real estate trust looks more attractive.
So as yields rise, the income becomes less attractive relative to bonds and causes a sell-off of the shares.
Ms Bao said the valuation of Reit shares right now does not reflect those risks, and so she has reduced her investments in this type of vehicle.
The fund manager is also wary of investing in consumer stocks.
She said such businesses do well in economic downturns because demand for the products they sell remains constant.
But she said those shares have risen to levels she does not feel are attractive as a result of lower bond yields.
The share price of consumer staple stocks move in line with bond yields, according to Ms Bao, because the income from the shares is viewed as being bond-like in its safety.
As bond yields rise, the dividends of those companies becomes less attractive and the shares sell off.
In contrast, she is keen on the shares of certain retailers, as she believes shares in the sector have fallen in unison as a result of fears about e-commerce companies, leaving some shares that have become bargains.
She has invested in the shares of Home Depot, a hardware store chain, on the basis that its business model cannot be “Amazoned away”, due to the bulk and weight of many of the items it sells making then unsuitable for delivery.
She is also keen on the shares of US banks. The fund manager commented that rising interest rates help the investment case for those shares as higher bond yields increase the income banks can earn from their bond holdings.
Jonathan Davis, who runs Jonathan Davis Financial Planning in Hertford, said he is allocated to the US equity market solely through a global equity fund.
He is concerned that a prolonged period of higher rates will ultimately hit stock market returns.
david.thorpe@ft.com
