Get ready to profit from Fed rate hike

shutterstock_117633013-1By Stephanie Tsui

As the U.S. Federal Reserve is increasingly likely to hike interest rates in December, market observers advise investors to ensure they are “Fed-ready” before the December meeting to capitalize on the likely upsides to the Fed’s policy tightening.

The U.S. economy added 271,000 new jobs in October, with the unemployment rate falling to 5%. Meanwhile, wages were reported to have grown by 2.5% in the previous 12 months. The stronger than expected economic data is increasing expectations that the Fed will tighten policy on December 17.

Since the probability of a 2015 rate hike has been discussed amongst investment communities for more than a year, Nigel Green, CEO and founder of deVere Group, commented: “Holding rates at near-zero is increasingly unjustifiable and it would be hard to think of a better time than now to raise them, given the economic situation.”

Many analysts worry that the stock market will stumble on the back of the Fed’s decision; however, Nigel is more optimistic and believes that the markets will take it as positive evidence of the strength of the recovery, showing that the central bank of the world’s largest economy is confident in the durability of the U.S. and global economies.

On the other hand, even though rising interest rates are expected to depress bond prices, economists believe the expected 0.25 bps change is so minor that it will not be able to compensate for the years-long near zero yields immediately.

Nigel suggests investors allocate cash to invest in stock markets to take advantage of the opportunities at the right time. “Whilst it is unlikely that we will see spectacular returns, there is no reason not to expect some steady growth.” He added.

Investors should pay attention to industries that are sensitive to rising rates. Banks and insurers are expected to rebound quickly as they will make more money when rates are higher, whilst utility companies offering attractive dividends now will probably become less attractive due to increased interest on debt, experts said. BM