Leading Australian equities manager, DNR Capital, looks at the share market’s current volatility and where it sees opportunity for investors to benefit from rising interest rates in its latest investment report.
DNR Capital Chief Investment Officer, Jamie Nicol notes that “bond rates have been a little erratic over the past month. They have been reacting to expectations of a US rate rise and responding to comments from various Federal Reserve officials.”
The IMF is expecting global growth to be around 3.3% although the developed market is more subdued. Global growth generally remains reasonably difficult. Nonetheless Nicol believes “we have seen a bottom in bond yields with global interest rates at multi year lows”.
“Bond markets have become crowded. Years of lower rates have caused significant flow of funds into bond markets and into bond proxies” he added.
“Leading indicators are on the rise. US personal consumption is rising by 2.9%, Fed models are suggesting circa 3% growth and commodity prices are up. The risk is that neglecting to raise rates now could force the Fed to tighten too quickly in the future.”
Nicol sees low bond yields causing bubbles in the valuation of assets such as commercial real estate and infrastructure which may cause instability in the future.
He points out that “low interest rates have lifted asset prices and companies have tended to return cash to shareholders via dividends and buy backs rather than reinvest the capital. This has exacerbated the gap between rich and poor and is arguably contributing to the current political climate where extremists are gaining traction, populist/socialists on the left and populists/anti-trade on the right.”
Nicol believes governments will need to stimulate reinvestment to drive inflation to ease debt pressures and provide jobs.
“This is leading to more aggressive fiscal stimulus programs from governments such as Japan and reduces the case to continue the monetary stimulus which has driven this scenario”.
The market has started to anticipate an increase in interest rates, Nicol said.
“The fear is that investors have become very complacent about the impact of inflation and the implications for asset allocation. We have seen low interest rates drive asset prices”, he added.
“Within equities we have begun to see a rotation leadership from defensive yielding companies towards laggards such as financials and resources. This provides an opportunity to benefit from higher interest rates and we believe our portfolios are well placed to outperform in such a scenario,” he said.
