“Fed raises interest rates” after meeting and agreeing If anyone hasn’t read it yet, You can go back and read it at
Normally, central banks, regardless of country, have two main functions: “supporting economic growth” and “controlling price stability”, with “policy interest rates” being one of the tools used to control economic conditions.
For the basic mechanism for using policy interest rates to control In the case of anoverheat economy, inflation has soared. Central banks need to raise policy rates, and if the economy stagnates with signs of a slowdown in the labor market, they will be forced to raise their interest rates. The central bank will also cut policy rates.
At this time, the U.S. economy is recovering with risinginflation, causing the Federal Reserve to signal a rise in “policy rates”, creating volatility across all financial markets. view website
A “policy rate hike” certainly affects the direction of financial asset prices. What assets should be invested or avoided?
1. Fixed Income
Whenever interest rates go up Bond prices are likely to fall. Because newly issued bonds will have higher interest rates in front of tickets after interest rates rise. As a result, bonds that are on the market with lower ticket front interest rates are less attracted by investors. Therefore, it has more selling force than buying force. Overall, bond prices have fallen, or we often call this risk “interestrisk.””
However, each bond of an age is negatively affected by different interest rate hikes. In general, the price of short-term bonds is less affected than long-term fixed income instruments, so investing in fixed income should be short-term fixed income.
For those who are still interested in investing in fixed income instruments, you can invest in fixed income instruments that are adjusted in front of the ticket according to market interest rates or inflation, such as floating interest debt instruments. Floating-Rate Note, fixed income instruments with variable interest rates based on inflation (Inflation-Linked Bond) to manage risks in this respect.
2. Property Funds and REITs
The rate hike clearly adversely affects property funds and REITs, with the marketcomparing dividend yields with bond interest rates, which are low-risk financial assets, and where bonds are rising in front of tickets. As a result, compared to the risks of assets, it is more attractive. As a result, the investment is likely to flow out of the group of real estate funds and REITs, which are high-risk assets.
Interest rate hikes do not directly affect stocks as they do on bonds, but indirectly affect both consumer and corporate spending, as well as in terms of calculating company values, but based on historical data, there is no clear evidence or correlation that an interest rate hike will adversely affect the entire stock market. However, it was found to have a positive and negative effect on each different industry group.
3.1 Growth stocks
Just the name makes it clear that market investors expect this group of stocks to continue to grow at a high level so that the fundamentals continue to support value. But the rise in interest rates has a significant negative impact on this group of stocks, as the returns on this group of stocks depend on current value levels and market expectations.
The impact is clearly seen through the calculation of value by “discount cashflow” in the future. When interest rates rise, the current value gained from reducing money flows will decrease. Coupled with the market’s core expectations per share, this group is based on current value. As a result, the group’s share price grew as strongly as it happened.
3.2 Stocks that benefit from interest rate hikes
It is one of the groups that has directly benefited from the interest rate hike. Whether the bank group uses short-term funds (deposits) to lend long-term loans, it has made more profit from differences in interest rates on deposits and loans.
Insurers are also more likely to make more profit with fixed ratereturns, but generate returns with floating interest rates. Floatingrates in the market, which are rising, or even a group of securities that have increased profits from higher borrowing rates.
It’s another group that has had a remarkable return to growth in the economy as employment returns to growth, affecting incomes and, finally, making consumers spend more on luxury goods. As the economy expands, it is often the time when interest rates rise as well. Interest rate hikes are not directly positive, but they are a pre-cue that luxury goods are about to have outstanding returns, and that manufacturers and industries are gaining animity from the recovery in consumption.
Consumer Products Group Consumer Staples and Utilities Group(Utillity)
There is a tendency to make lower returns, but not so much. While some companies may have increased investment costs, raw material prices will stabilize or fall as interest rates rise. The impact of rising costs is therefore refracted with lower raw material prices.
Raising interest rates can have a short-term impact on the stock market, but it may not be a long-term negative because interest rate hikes often occur at times of active economic activity. The negative effects of the interest rate hike will be overturned off by better-than-expected company performance and continued improvement.
The most important thing is the “Fundamental” of the business. There will need to be revenue growth and future profits. Even if positive factors come in, if the company is unable to grow as the economy recovers, the company will not be able to grow. That stock is considered un attractive to invest in.
Dollars and Commodities
When the “Fed raises interest rates”, it attracts money to invest in financial assets in dollars. TheUSD Denominated Assets strengthened the dollar, which is one of the costs of commodities. Theappreciation of the dollar has increased the cost of commodities, resulting in lower demand for commodities. After all, commodity prices are likely to fall.
Bitcoin(BTC) is used for many purposes, one of which is an inflation hedging asset. When interest rates are raised to extract an increase in inflation, it results in a flow of money out of inflation hedging assets. Puts pressure on bitcoin, which is associated with the opposite direction of the dollar. so Interest rate hikes therefore negatively affect bitcoin price trends.
During the interest rate hike, Investors may consider reducing their investment in fixed income instruments by the proportion of addresses that should be focused on short-term fixed income instruments. Floating Interest Income Instruments Floating-Rate Note:Inflation-Linked Bond
Property funds and REITs can also reduce their investment ratios, including commodities and bitcoins, which may be devalued by the dollar as another factor that influences interest rates on the direction of commodity prices at certain times.
Then, as the economy enters the expansion period, it reduces the financial group’s share and increases the proportion of luxury goods. Meanwhile, in the tech world, there are opportunities to be open to long-term growth in stocks. Investors should take the opportunity to gradually accumulate stocks into their portfolios.