Macquarie bank predicts a US interest rate hike will boost the ASX in 2016. Yet, as with anything, there’ll be winners and losers.
Stock markets are bogged down by uncertainty at the best of times. And 2015 has been a particularly volatile year for equities.
On the one hand, slowing global growth, led by China, is largely responsible for the recent spate of selloffs. Nowhere was this more apparent than in Chinese markets themselves. The Shanghai exchange, for one, lost over 30% of its value in a month.
Closer to home, we saw the ASX plunge below 5,000 points in September. That put it on track for its worst quarter since 2011. And while there was a mild recovery, the index is only just above this level at 5,015 today.
Yet the bigger concern is the potential effect of global interest rate policies on stocks. There’s a pervasive fear about where markets are now, and where they’re going in the future. And most of this doubt stems from this uncertainty over the future direction of interest rates.
That’s as true of Australia as it is the US. But unlike Australia, US rate movements will dictate the trends for markets across the rest of the world. Which makes US rates the key thing to watch out for in 2016. Why?
If US rates go up, all the credit in the system dries up. If money isn’t expanding, then it’s contracting. There’s less of it go around. Businesses, and consumers, borrow less because the costs of doing so rise. Economic expansion, and the growth it promotes, weakens.
All told, it leaves investors less confident about investing in stocks. Anyone worried about a rate lift-off has reason to fear what it might mean for their portfolio. The effects of rising rates would spill over into global markets overnight. And there’s more than enough reason to believe it would choke the ASX as well.
This is the mindset of investor at the moment. And it’s the reason why you’re probably feeling a little on edge too. But there’s evidence that this assumption might also be wrong.
Macquarie forecasts a good year on the ASX
Macquarie’s research points to predictions showing an 84% chance of Fed rate cut in December.
We can debate the likelihood of this for days. Especially when these figures are based almost entirely on positive US jobs numbers for October. Yet we also know there have been plenty of subpar monthly jobs figures dotted throughout the year too.
In reality, there’s nothing certain about a rate hike. It could happen soon. Or it could happen in 2017. No one really knows — not even the Fed it seems.
Yet for argument’s sake let’s assume Macquarie is right. We’ll roll with this idea that US rates will rise in December. What would that actually mean for investors?
Here’s Macquarie’s take:
‘Macquarie’s house view is for a December lift-off and is more aggressive than the market, with 100 basis points of tightening through year-end 2016.
‘The expectation of a rate rise is more akin to the Federal Reserve dipping their toe in the water, with any extended tightening expected to be slow and gradual.’
In other words, Macquarie predicts a 0.25% rise in December. After which, they see scope for another three rate hikes during 2016, taking the total to 1%. That would put US rates somewhere in the region of 1–1.25%.
You’d be forgiven in thinking that four rate hikes spell disaster for stock markets. After all, tightening rarely spells good news for credit-dependent assets like share.
Yet Macquarie’s found a window of opportunity that might be worth keeping an eye on. Its research looked at evidence of 18 prior occasions in which the Fed either lifted or cut rates, dating back to 1954. In eight of those cycles, stocks rose 20% in the year following the first rate rise. In only three of those cycles did shares lose value. Macquarie writes:
‘Traditionally, Australian equities have performed strongly into the start of a US rate tightening cycle, rising on average around 10% in the following 12 months.
‘Stocks are also likely to remain attractive until after the third hike, after which bonds often outperform due to the rising risks to economic growth.’
If Macquarie is right, 2016 could be a good year for the ASX. If a rate hike takes place in December, history suggests the ASX could end up at 5,500 points by 2017.
Yet it’s all based on the argument that US rates are heading up. And that’s no certainty.
What’s more, the timing of the Fed’s movements remain unclear. If it does move to lift rates, there’s no telling when. Some estimates predict June 2016 at the earliest. Such a scenario would keep markets on tenterhooks for the next six months. And volatility could weigh on the ASX throughout this period.
Sectors heading for potential gains on the ASX
If Macquarie’s research pans out the way it thinks it will, there’ll be both winners and losers on the ASX. Macquarie’s number crunching focused on the stocks and sectors that outperformed even as US interest rates rose.
It identified healthcare, consumer staples and financial stocks as the sectors with upside.
The unlucky losers from rate hikes were typically telcos, utilities and real estate investment trusts. Providing history works in Macquarie’s favour, it makes blue chips likes Telstra [ASX:TLS] a potential investment pitfall in 2016.
Ultimately, your opinion of Macquarie’s assessment depends on the view you take with US rate policy. As far as I see it, there’s as much likelihood of more quantitative easing as there is of a rate hike. Mind you, stock investors probably won’t mind that either…
Contributor, Markets and Money
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