The appetite for risk among investors has now returned, deVere Group CEO Nigel Green declared in a recent note following the Fed’s latest interest rate decision.
Mr Green noted that gains in risk assets have been observed recently despite ongoing high inflation and monetary policy tightening by central banks around the world.
“Investors appear to have rediscovered their appetite for risk, with global stock markets and high-yield corporate bonds both making steady gains over the month so far,” he said.
“Interestingly, it has been the riskier parts of the stock market universe that have performed best: global small cap stocks have outperformed global large cap stocks, while in the US, the tech-heavy NASDAQ index has outperformed the broader based S&P 500 index.”
The Fed recently announced its second 75-bp rate hike in a row, while the Reserve Bank (RBA) is expected to deliver its third consecutive 50-bp increase on Tuesday as high inflation continues.
“Typically, markets get into a tailspin over interest rate hikes, especially the size of the Fed’s latest 75-bp [hike],” commented Mr Green.
“But investors have seemingly shrugged this off, maybe because it was largely priced-in, maybe because the Fed Chair suggested rate rises may now slow.”
Among the key drivers behind the recent rally, Mr Green said, is the belief that central banks will be able to squeeze inflation out of the system.
“The higher interest rates go in the near term, the sooner they can come down and help facilitate a new economic cycle,” he said.
Mr Green suggested that stock market valuations no longer looked expensive after a poor first half. He also drew attention to the persistence of the ‘TINA’ (there is no alternative) argument.
“Although central banks are raising interest rates aggressively, they remain negative in real terms,” he stated.
“Equities have the advantage of being linked to the real economy, with many companies able to raise their selling prices with inflation and so offer investors a level of protection from inflation that cash and bonds can’t.”
Finally, the deVere CEO argued that big companies were in a generally sound position.
“Big tech in the US is cash-rich. Global energy and mining companies are enjoying windfall earnings. Rising interest rates help financials boost profits," said Mr Green.
“Meanwhile, many companies have used the rock-bottom borrowing rates of recent years to refinance their debt at much cheaper rates.”
While remaining bullish on the outlook, Mr Green also pointed out that economic data was still weakening, and said that Europe in particular looked vulnerable to a recession later this year.
“Investors’ response should be to avoid panicking and stick to basic investment truisms,” he concluded.
“You should look to allocate cash to risk assets, while remaining well diversified by asset type, as well as sector and geography.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
