News

Markets have struggled to make headway this month after a rise in geopolitical risk in the Ukraine and Israel, financial risk over the struggling Portuguese Banco Espirito Santo and, not least, the question mark of when the Federal Reserve Board (FRB) will begin to increase US interest rates.

Janet Yellen, chair of the FRB, maintained in her recent testimony to the House of Representatives Committee that she expects interest rates to remain low. Tellingly, however, she also remarked that if unemployment continues to fall at the current rate US interest rates may have to rise a little earlier than currently anticipated by the bond markets.

An early rate rise would put pressure on global bond markets. This is why we are retaining low interest rate sensitivity in portfolios but, on the condition that interest rate increases are reasonably slow, we think equities can still make headway. We would also expect the recent outperformance of more bond-like, defensive equities to reverse versus more economically sensitive companies (cyclicals). This is provided, of course, that the reason for interest rate increases is because economic growth is progressing well.

On that note, earnings reporting season has begun in the US and the early signs are that the vast majority of companies are beating analysts’ expectations for both earnings and revenue generation. This is particularly true for banks, which augers well for expected equity returns. Whilst we are alert to the risks to financial returns, we believe there are still good reasons to maintain a positive stance.