What three things should investors consider in response to the latest minutes from the US Federal Reserve?
The central bank’s minutes of its last meeting went public, and they said that hike decisions would be reliant upon a meeting-by-meeting analysis of the economic data.
“Some participants expressed concerns about the potential of financial conditions tightening excessively as a result of a quick removal of policy accommodation,” read the minutes.
Most investors say they anticipate the Fed to begin raising rates in March with a starting increase of half a percentage point, and to continue hiking rates throughout the year.
History teaches us that financial stocks perform well when rates are being hiked.The world’s most influential central bank’s minutes show a slightly dovish tone regarding its plans to hike interest rates in 2022, although rates are still going up.
Against this backdrop of the move towards normalisation of monetary policy by the Fed and other major central banks around the world, I believe, investors should consider increasing their portfolio exposure in three key sectors: tech, financials and raw materials.
There will be some volatility in the tech sector as rates go up and economic growth slows.
Higher rates mean tech firms’ projected profits are worth less in investors’ valuation models as peak earnings are not expected for years to come.
However, the pandemic has led to the advancement of fundamental trends, such as online shopping, remote working and gaming – all of which have tech at their core.
History teaches us that financial stocks perform well when rates are being hiked. That said, if the Fed acts too fast and too extreme, this should be reviewed.
Raw materials is the other sector that investors should consider – despite the slow down in economic growth in major economies. Traditionally, they’re a safe inflation hedge. Plus, they are currently undervalued in the market.
In addition, we can expect infrastructure spending by governmental agencies to continue – or even increase.”
On a wider note, diversification, as always, remains investors’ best tool to position themselves for risk mitigation and to be able to seize the opportunities as they are presented in the market.
Financial history suggests that long-term investors with a balanced, multi-asset portfolio, are best placed to ride out such periods of market nervousness as the macro-economic conditions alter.
As monetary policies are normalised, there will be winners and losers. A good fund manager will come into their own in this regard.
Nigel Green is chief executive of the deVere Group
