MONTHLY UPDATE: HAVE INTEREST RATES FINALLY PLATEAUED?

1. WHAT’S HAPPENING IN FINANCIAL MARKETS?

Whisper it – after 18 months of fast increases, western central banks may finally be done hiking interest rates.

The US Federal Reserve (Fed), Bank of England (BoE) and Swiss National Bank all decided against a further rate increase in October.

We may not be out of the woods yet though. It’s worth noting that both the Fed and BoE have warned the door to further hikes remains open.

The Fed message that caught the most attention last month was that, while interest rates may not have to rise further, they could stay at current levels for longer. Markets now believe we won’t see a rate cut in the US until the latter half of next year.

Sven Balzer, Head of Investment Strategy at Coutts, says, “Basically, central banks are continuing with their ‘data dependent’ approach, waiting for new inflation and labour information before their next meetings.

“Markets are monitoring this situation very closely – investors are increasingly hoping for an end to rate hikes. But there are other potential risks along the way.”

China troubles, oil price surge and US shutdown

Those potential risks include what’s happening in China. The world’s second largest economy is still suffering from sluggish domestic demand and a property crisis. This could change if the Chinese government successfully puts a firm foundation under growth expectations through spending and tax policies. But efforts so far haven’t done enough to reassure investors.

Meanwhile, oil prices have been rising continuously in recent months amid supply concerns, edging ever closer to $100 a barrel at the time of writing. Some fear this could hamper central banks’ battle against inflation (although we feel we’re not there yet – see spotlight below).

Finally, although a US government shutdown was averted literally in the last minutes of September, the solution only funds the government until 17 November. Considering the limited time and large gulf between both houses of Congress, another looming shutdown is likely in November. Such shutdowns have in the past had limited economic impact, but they can reduce the amount of economic data available and cause uncertainty.

Despite these challenges, Sven stresses that there are reasons for investors to feel a little more positive.

“The robust US consumer and continued slowing inflation trends continue to support the  macroeconomic outlook for now, which is supportive of risk assets,” he says. “Considering last month’s small correction in equity markets, our risk appetite has marginally increased.”

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.

2. WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?

Reflecting the slightly more positive outlook, we’ve been positioning our investments for potential opportunities. Coutts recently reduced their exposure to US government bonds and increased their allocation to UK corporate debt and global investment grade debt – which currently offer better yields.

On the equity side, Coutts’ expectations for Japanese ‘value’ stocks (stocks that are more attractive than their earnings would suggest) have improved. Japan is currently leading global economic growth, posting better-than-expected annualised GDP growth of 6% at the end of the second quarter of the year. As a result, they’ve increased exposure, while reducing their investment in European value stocks which are more challenged.