Are You Fed-Ready?

It looks increasingly certain that the U.S. Federal Reserve will hike interest rates for the first time in nine years in December.

The probability of a 2015 rate hike has been the source of much rumour and speculation for more than a year.  But stronger than expected U.S. employment data in October - the world's largest economy added more than a quarter of a million jobs in October – has fuelled expectation that a move from near-zero rates will take place next month.

We’re as confident as we can be the move is imminent – especially as Fed Chairman Janet Yellen describes a rate rise in December as a ‘live possibility’.

Indeed, given the economic situation, holding rates at near-zero is increasingly unjustifiable. Plus a 0.25 per cent rise now is a better way forward than having to raise rates higher and faster later.

To my mind, the Fed needs to act sooner rather than later.  If it fails to do so, it’s going to be blocking itself into a corner as we’ll be in a loosening cycle and it’ll have no ammunition in its arsenal to do anything about it. Clearly, Ms Yellen will be aware of this, or should be, and will be looking for the hike next time around, after it baulked at the idea in September.

Against this backdrop, I am urging global investors to make sure that they are ‘Fed-ready’ ahead of the next announcement it makes in December.

Why so?

Even though no-one can say for sure how the markets will react to what will be the first rate hike in almost a decade, I suspect that after the Fed’s cautious tone for so long, the markets will take a rate hike as positive evidence of the world’s defacto central bank’s confidence in the durability of the underlying U.S. and global economies.

Should this consensus emerge in the investment community, which I believe it will, corporate earnings growth will be supported.

Therefore, investors should prepare to capitalise on the likely upsides that will inevitably come along as a direct result of the Fed’s policy tightening.

They should be prepared to allocate cash to invest in stock markets. Whilst it is unlikely that we will see spectacular returns, there is no reason not to expect some steady growth.

Until the statement and the accompanying notes are made, it cannot be predicted with accuracy how each asset class will respond to the rate hike.  As such, part of being ‘Fed-ready’ should also be to ensure that portfolios are diversified.  Proper diversification across asset classes, industrial sectors and geographical regions position investors so that they are best placed to take advantage of the opportunities.

An experienced fund manager will be invaluable in selecting the right funds at the right time.