Watch out! Fed turns hawkish!

Higher interest rates means more profits for banks and less for companies with high debt levels. Prefer banks, avoid REITs and Telcos.

 

Hawkish Fed

  • On 14 Dec 2016, Fed raises its rates – the second in a decade.
  • But its dot plot indicates 3 hikes every year from 2017 to 2019.
  • Monetary policy has turned the corner. The US labour market is at full capacity and wages are trending higher.
  • Fed will turn increasing hawkish to guard against inflation.

When interest rates go up

  • Banks will earn higher interests. Insurance will become more profitable.
  • But most other companies will pay higher interest expense.

How to invest?

  • Prefer: banks (earn higher interest), Insurance, Venture (exports to US where economy is improving)
  • Avoid: REITs and Telcos (high debt levels mean higher interest payments, less attractive yield spread)