Et was not entirely unexpected, but the consequences are far-reaching. The decision by the US Federal Reserve (Fed) on Wednesday evening to gradually phase out its bond purchases could mean a turning point for the global financial markets. “It is clear to everyone that the Fed will raise its key interest rate a few months after the foreseeable end of bond purchases,” says Jörg Krämer, Commerzbank’s chief economist. Most central banks are unlikely to be able to avoid a cycle of interest rate hikes in the United States, even if Europe’s central bank will not yet join in next year: “In this respect, a global turnaround in interest rates is on the horizon,” says Krämer.
Global interest rate turnaround – what does that mean for investors? Do you have to frantically reorganize your portfolio because of the Fed? Carolin Schulze Palstring from Bankhaus Metzler waves it away. “No, there is currently no reason to panic.” The turnaround in monetary policy had been on the horizon for a long time. Very few market participants were caught on the wrong foot.
Although the pace of new bond purchases is to be gradually reduced, the Fed’s monetary policy will initially remain expansionary. “It may take some time before the financing conditions tighten so much that they become a burden on the economy – we expect the central banks to proceed very cautiously in normalizing monetary policy,” says Schulze Palstring.
Beware of low-margin companies
“If the central banks then raise their key interest rates, the yields on the bond market should rise,” says Schulze Palstring. Increasing yields usually led to price losses on debt instruments – especially with long maturities. The remaining term for bond investments should therefore be kept short. “Since real interest rates, i.e. the nominal interest rate minus inflation, will remain negative for a while, in our opinion, we continue to favor investments in assets, preferably stocks.”
The stock market can cope with rising key interest rates if they are accompanied by an economic upswing and the rise is gradual, says Schulze Palstring. Nevertheless, caution is advised: In an environment of slowly rising financing costs, low-margin, highly indebted companies could have a harder time than companies with a solid financing structure and pricing power. Highly valued, speculative growth stocks with earnings well into the future could also come under pressure if interest rates rise.
Reinhard Pfingsten, chief investment strategist at Bethmann Bank, also advises: “Keep investing in stocks and continue to focus primarily on cyclical areas such as raw materials, financial or industrial stocks in the portfolio structure.” In addition, Europe will again be somewhat more attractive compared to America because an interest rate hike in this country is not yet expected in 2022.
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Ulrich Stephan, Deutsche Bank’s chief investment strategist for private and corporate customers, also sees no need for investors to completely reorganize their portfolio: “The Fed’s decision to reduce the volume of its purchase programs came as no surprise to me,” he says. The American central bankers have recently communicated their monetary policy very clearly and proceeded cautiously.
Bet on technology stocks and cyclical sectors
“Looking ahead, the US stock markets should still be supported somewhat better, since the residual risk of an early tightening of monetary policy has been postponed for the time being,” says Stephan. Accordingly, he sees no need for investors to change their portfolio now.
“For some time now, we have recommended overweighting stocks versus bonds and betting on technology stocks and more cyclical sectors,” says Deutsche Bank’s investment expert. These included, for example, automobiles and raw materials. In addition, there are also industrial stocks, which, however, have already done well in many cases and are no longer valued favorably.
“Shares in financial institutions in particular should benefit from the expected rise in bond yields,” says Stephan. Banks, insurers and financial service providers are also rated attractively.
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