Market Jitters Over Rate Hikes Unwarranted: Barings03.12.2015
With the U.S. Federal Reserve seemingly poised to hike interest rates, much speculation has been given over to how this will impact equity prices. However, current stock prices already reflect the view that rates will go higher, and therefore any downward pressure on prices can be attributed to an overreaction, according to Hayes Miller, head of North American multi-asset at Baring Asset Management.
“Provided that what’s happening is the normalization of interest rates, and that interest rates can rise at the short end, and that the long end can rise without it becoming driven by an inflation expectation, then we think the equity market can absorb it,” Miller said at a March 10 briefing. “If earnings aren’t impacted, then there’s no reason to think that the equity market has to dive just because interest rates begin to rise.”
“The market is reacting very strongly to every bit of economic news that’s indicative of what might happen with interest rates,” he added. “Recent negative price action in the market has been about the fact that interest rates are going to rise in the short end.”
There’s associated concern that the rise in short-term rates will mean a flatter yield curve. “A flatter yield curve means bad things for banks, because they have to now give us the depositors something more than 10 base points a year and that they can only lend it out at the 3% that they’re used to lending it out,” Miller said.
The consensus view is that the 10-year rate would have to rise to close to 4% before it would become a problem for equities.
“We have a long way to go to 4%; the 10 year is currently sitting around 2.3%, so we could see a lot of backing up,” Miller said. “Not only that, we could see the yield curve actually steepen before it becomes flatter because the response at the long end would be just as big as the response at the short end.”
He added, “We think that the Fed’s going to be very focused on signaling. They’re going to make sure that they don’t surprise anybody. As we were talking earlier, the big debate now is are they going to see a something smaller than a quarter percent rise at the short end, just to sort of tip toe into these increases.”
As portfolio manager for Barings’ Global Dynamic Asset Allocation fund, which has $11.5 billion under management, Miller oversees an absolute return strategy that includes equities, bonds, and commodities, with the objective of generating equity-like returns with less than 70% of the volatility of equities.
Miller is a member of Barings’ Strategic Policy Group, the company’s global macro research and asset allocation group. “We try to approach the world from a real top down point of view, and understand the way that asset allocation works and how countries and sectors are driving markets,” he said. “We avoid as much as we can the temptation to get more granular and talk about stocks. We have a whole separate team that do stocks, and they are very good at it, but we are the top down part of the firm. “
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