How do you position against rising interest rates?

How do you position against rising interest rates?

05 December 2018 from Anna Svahn
The economy is currently doing so well that Larry Kudlow, Trump's financial advisor, recently went out saying that a recession is so far ahead that he can not see it and it is "nonsense" to be worried about an economic collapse in near future. This does not sound completely different from Ben Bernanke's statement at the beginning of 2008 when he announced that Fed did not see any recession in the near future - even though we were in the middle of one.

 

 
The economy is going well, in the United States, unemployment is down 4 percent, which is lower than just before the 2008 financial crisis. The same thing we see in Sweden, where the same figure is 5.5 percent. If we look at the whole of the EU, unemployment is 6.7 per cent, but with a wide variation, the Czech Republic is low at 2 per cent, while 20 per cent of Greece's population is out of work.

In a perfect world, interest rates should be in line with the economic growth of a country or region, otherwise money will be free. Instead, in recent years, we have seen strong economic growth combined with low and, in some cases, even minus rates. To consider why the ECB, the Riksbank and the Fed have acted as they did is one thing, but the more interesting is how the forecasts look for the future.

In the days to come, the ECB announced the end of the buy-back at the turn of the year, despite weaker indicators. The euro area economy only grew by only 0.2 percent between the second and third quarters has been shown with new statistics since the October meeting. In the United States, it has begun to raise interest rates and is expected to continue, despite the fact that President Trump went out saying that he wanted the Fed to lower the current "high" rate that he was afraid would cause growth to slow down. Despite the US's earlier and now future planned increases, the ECB still flags to keep the rate unchanged until summer 2019, while the Riksbank has announced increases in Sweden in December or February.

As we can see, the decisions are about the interest rates of mixed compots and we still do not know if Sweden will follow the ECB and hence do not raise interest rates already in winter or if Ingves nevertheless puts the brake on the ongoing loan crusade right now. Howard Marks often speaks of not only positioning himself against the most likely outcome without spreading our risks and thus positioning ourselves against several possible outcomes.

Three scenarios: unchanged, raised or lowered interest rate

Perhaps the most likely outcome is that the Riksbank will leave interest rates unchanged as long as the ECB does the same.

If Stefan Ingves and the Riksbank are likely to raise interest rates according to their own statement in December or February, this will lead to lower margins for banks and slowdown growth (which has already been curtailed despite stimulating monetary policy). In that case, equities are not an attractive asset and the potential downside is much larger than a possible upside.

Even though Stefan Ingves and the Riksbank said they are planning to raise interest rates relatively soon, we still have to remind them that they failed to correctly calculate a forecast for several years. The new well-known "rikseligskott" testifies to difficulties in putting and following their own forecasts. IF the Riksbank (if it is possible, you may still say) would choose to lower interest rates further, this would lead to higher margins for the banks, as they would probably not lower their interest to customers - and thus it could potentially be an interesting industry to look at.

Summary

Given the uncertainty that one can still assert, the Riksbank's ability to follow its own forecasts, coupled with the fact that we are well into a boom with limited potential growth, we should focus our eyes on markets other than those who already had one strong decade and instead look for cheaper markets with high potential growth. The fact that the economy has been good for ten years and the stock prices reflected it does not mean that the continuation will look without it being time to take a look at a country or region where the values are lower. - How do you do that and what sectors you should look into in what order will I rewrite in the next article.

@Anna Svahn

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

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26/03/2019 13:27:58

 

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