With the Fed expected to raise rates later this year, should investors be concerned?

Anton Eser is co-head of global fixed income at Legal & General Investment Management, says Yes.

The impact of tighter US policy seems to be underestimated. When markets were unsettled by the potential for QE tapering in 2013, bond yields rose, equity markets corrected, and high yield and emerging markets saw heavy fund outflows and sharp price falls. Today we once again step into the unknown, in anticipation of the Fed’s first rate hike since 2006. But the stakes are higher than during 2013’s “taper tantrum”. Long-term structural problems have not been resolved. Vulnerabilities could reveal themselves as rates go up. Only a handful of rate hikes could slow the economy to such an extent that the Fed pauses and even considers reversing policy. Even if yields do not move substantially higher, the taper tantrum showed that volatility can lead to fund outflows and wider credit spreads, leading to a period of negative total returns.

Bill O’Neill is head of investment office UK at UBS Wealth Management, says No.

We expect the Fed to tighten policy once this year and again on a number of occasions next year. While some may feel this represents a significant hurdle, we believe investors shouldn’t be alarmed. The US outlook is brightening: weakness in consumer spending is turning around; the jobless rate is within striking distance of the Fed’s full employment target; and competition for labour is heating up. When Fed rate hikes accompany such underlying economic improvements, US equities tend to perform strongly. When you look at the previous 12 rate cycles since 1953, equities have climbed by 9.4 per cent on average in the 12 months preceding the first hike. Apprehension around an increased cost of credit for US corporations is also overstated. We don’t expect hikes to sharply increase the burden of debt payments for S&P 500 firms. If investors allow worries over Fed tightening to overshadow the reasons for staying invested, they could lose out to their bullish peers.

Related articles