As the US Federal Reserve finally lived up to expectations and initiated its first interest rate tightening for, pretty much, a decade, the funds industry reacted with a plethora of views about what this means for investors.
What follows is a series of comments that have been collected by InvestmentEurope‘s editorial desk from around the industry.
Saker Nusseibeh, chief executive, Hermes Investment Management said:
If 2015 was the financial equivalent of Waiting for Godot, in which markets were uncertain about Chinese growth, geopolitical risk (and not just in the Middle East) and the timing of the first rise in US interest rates for almost a decade, investors will end the year with some sense of closure should the expected rate rise come to fruition.
The federal funds rate will have risen from the emergency-low level set in 2008, and further tightening is likely as the domestic economy continues to grow, supporting jobs growth and generating inflationary forces. In time, the Federal Reserve’s decision will be followed in a staggered fashion by the Bank of England, continuing the historical trend. Such policy tightening in the world’s largest economy, combined with ongoing economic expansion in China – whose growth rate of 4% to 5%, although lower than what markets got used to, remains substantial for the world’s second-largest economy – should settle two of this year’s major causes of uncertainty and help make a constructive case for equities.
Even though today’s decision is widely expected, it will still have repercussions – particularly in high-yield bond markets, where liquidity risks have intensified. Since 2008, the global high-yield market has boomed, more than doubling from $0.8tn to $2.2tn.1 Interest-rate normalisation will herald the end of seven years of cheap corporate debt, likely diminishing the new issuance that has satisfied investors’ demand for yield. Credit fund managers with the skills and foresight to prepare for this environment will come to the fore.
This should be the focus of volatility at this stage of the tightening cycle. After waiting so long for the arrival of higher US rates, investors have scant reason for not being prepared – for today’s expected hike, and those to come.