Experts: US Fed and RBA moved to choke out inflation this week. Here’s what it could mean for equities
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The Fed finally made its first move to snuff out the raging hot inflation in the US, which is currently at 8.5%.
On Wednesday, the US central bank raised its benchmark rates by 0.5%, the largest hike since the year 2000.
US Fed chairman Jerome Powell signalled that more raises are coming this year, albeit at a pace more friendly to markets.
“We need to do everything we can to restore stable prices,” Powell told a FOMC press conference.
“We will do it as quickly and effectively as we can. We think we have a good chance to do it without significant increase in unemployment or sharp slowdown.
“But ultimately, we think about the medium and longer term, and everyone will be better off if we can get this job done – the sooner, the better.”
The chairman has however ruled out the possibility of a 75bp hike anytime soon, saying that it “wasn’t something the committee was actively considering”.
His comments sparked Wall Street to life, with major US stock indices rising to their biggest one day gains since May 2020. The S&P 500 surged by 2.99%, the Dow by 2.81% and tech heavy Nasdaq by 3.19% on Wednesday.
The less hawkish stance also drove all major global currencies higher against the USD, with the Aussie dollar climbing to over US72.5c on the news.
The Fed’s move follows a similar move by the RBA on Tuesday, when the Aussie central bank hiked its cash rate by 0.25% to 0.35% – marking its first rate hike since 2010 as inflation surges to 5.1%.
In light of these new developments, Stockhead reached out for comments from fundies, to see how these recent moves could affect the Aussie share market.
Shaw Partner’s Adam Dawes believes the market should not be overly worried about the first two rate hikes, but should instead focus on the last two.
“Despite the Fed hike last night, the US market was stronger. The reason for that is, we’re not usually worried about the first two interest rate rises. We’re worried about the last two,” Dawes told Stockhead.
“If interest rates are going up, that means the economy is moving in the right direction.”
“The US market has already priced in seven rate hikes this year, and the reason the market rallied last night was they weren’t going to do the 75bp rate hike,” Dawes added.
In Australia, Dawes believes the market was a bit surprised by the RBA’s decision on Tuesday, but says it was the right move.
“The Aussie market was a little bit surprised. We thought that their interest rate hike was going to be 0.15%, but they went for a full 0.25% increase,” Dawes explained.
“So that rattled our markets a little bit, but I think it was the right move by the RBA.”
Dean Fergie of Cyan Investment Management agrees, saying that it has been a bit of a shock because the RBA had previously said it wasn’t going to raise rates until next year.
“But my belief is that fear of these rate rises is actually quite a bit worse than the reality,” Fergie told Stockhead.
Fergie also believes the strong interest rate rise is a reflection of a strong economy, and that should be positive for equities.
“The outlook has been priced in by the bond market, rates are still pretty low and the economy is in a pretty good state.
“So maybe it’s not as bad as we first thought, and it’s almost like sell the rumour, buy the fact,” he said.
In terms of which sectors will do well in this rising rate and inflation cycle, Dawes says the commodities market has been a really good hedge against inflation.
“The strength in all of the commodities minus gold and oil, has definitely been stronger.
“Iron ore is maintaining its stance. Copper, aluminium, uranium have all been been a great hedge against inflation, and we don’t see that commodity cycle finishing anytime soon.
“You’ll see a beneficiary of the commodities businesses doing well as interest rates start to move higher.”
Bank stocks also generally do well in a rising rate environment, but there’s more of a push and pull effect at play.
“Banks generally benefit as interest rate rise because make more money on deposits, but at the same time their home loan businesses get affected. And you’ve seen the markets reacting negatively to that,” Dawes said.
For Fergie, stocks that could immediately get impacted on rising rate cycle are the higher dividend paying stocks, like the bigger blue chip banks or real estate trusts.
“For investors who buy stocks for their dividend income, if the market now finds there are other lower risk alternative investments that are yielding more than three or four weeks ago, then I think there will be some general selling pressure on those stocks,” Fergie explained.
The consumer discretionary sector will suffer, according to Dawes, because of the wealth effect from people having to put more money into their home loan repayments.
But the Tech sector is an interesting one where Dawes sees some potential values.
“There’s potentially some value there that people might want to start to look at,” says Dawes.
“We’re going to be running a scan over the next couple of days of some stocks that are under 10 PE, and have a dividend yield of 5%,” Dawes said.
“From there, we’re going to try and look to get a bit of a shopping list together of some of those stocks,” he said.