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How to Invest Under Current Market Conditions
The global markets are undergoing tremendous uncertainty and volatility of late. We are witnessing the confluence of multiple factors – some of which are unfavourable to equities traders. For example, the Fed FOMC meeting scheduled for December 15/16 looks likely to implement the first interest-rate hike in 6.5 years. Interest-rate the current levels are 0.25%, and the general consensus among those polled by the Wall Street Journal indicates that at least 80% of respondents are of the opinion that a Fed rate hike will take place on December 16. This is based on the following factors:
• The core inflation rate is 1.9%
• Consumer Price Inflation has increased
• PMI data for manufacturing and services is largely positive
• The US economy is growing at a healthy rate, albeit a little slow
• US non-farm payrolls increased substantially to 271,000 in October 2015
• The US unemployment rate is currently 5.0% – down from 5.1% of the previous reading
The aforementioned factors are positives as they relate to the US economy. In terms of business activity, any reading above 50 is reflective of an expansionary economy and positive sentiment. The business confidence index is 50.1, the manufacturing PMI is 54.1 and the services PMI is 54.8. All of these figures for recent months with the exception of manufacturing PMI have plunged month-to-month, but they still remain upbeat for the most part.
If the Fed hikes interest rates how will this impact on the stock exchange?
There are several ways to look at the implications of a Fed rate hike on the stock exchange. For starters, the general rule is as follows: rate increases lead to selloffs in equities. However the dynamics of this relationship require further understanding. If you’re looking to invest hard earned money in equities, and you know that the fed is bound to raise interest rates, you may wish to hold off. What happens when interest rates rise is that the cost of borrowed capital/credit becomes more expensive.
As a result banks and financial institutions will be even more or less inclined to facilitate credit transfers to clients when the opportunity cost of money lost increases. Since long-term loans, credit financing and the like will have the effect of increasing expenses for companies, the share prices will ultimately suffer. The reason for this is simple: when companies are generating less revenue as a result of higher costs, this leads to loss of confidence in the company stock. Unless the company passes on the costs to customers, the net effect of a rate hike on equities is negative. However there is a substantial likelihood that markets have already factored in the possibility of a rate hike.
The golden rule of investing in equities is as follows: buy low sell high. The seemingly simple concept requires tremendous commitment, dedication and insight for those who are seeking to apply it in practice. We do know for example that at this point in time commodities prices are a multi-year lows. Barely a year ago, the price of crude oil was trading over $120 per barrel, today it is between $40 and $45 per barrel. This begs the question: how do you invest in a commodity or a stock that is persistently weak if you don’t know where the bottom is? It is clear that there is plenty value to be gained in many commodities right now, notably, gold, silver, copper, platinum and coal. Virtually any of the stocks are at their 52-week low points and the only trajectory is up.
OPEC is not going to cut production to scale back its operations at the risk of losing market share. As such the price of crude oil will eventually force out the high-cost producers. There will be a gradual consolidation of the energy sector and crude oil once again coming to favour in 2016. This is simply inevitable: the world has an insatiable appetite for crude oil, but oversupply, high inventories levels and slack demand vis-a-vis China has provided the markets. Emerging market currencies have taken a beating on the back of news that the USD will continue rising through December and beyond.
Buy Value Stocks Like Apple and Avoid Voodoo Mining Stocks
The stocks to look out for in terms of value would be by technology stocks, crude oil, metals across the board etc. Wall Street fund managers have decreased their exposure to many volatile Chinese assets, and this has also helped the US to stage a recovery of sorts. When the Fed raises rates, the USD will strengthen, emerging market currencies will weaken and capital flight from those countries will accelerate. Mining stocks like BHP Billiton, Anglo American, Rio Tinto and others are all persona non grata now. Avoid mining stocks because they are under tremendous pressure as a result of China weakness and the gradual turnaround strategy that China is adopting. Commodity prices are going to stay unusually low into the foreseeable future as a result of emerging market country dependence on China as a major import/export power.
Author Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting company –InterTrader.