almost 3 years ago • 3 mins
Investors have been on the edge of their seats as they watch the US Federal Reserve (the Fed) for any sign of a rise in interest rates.
What does this mean?
The US has pumped huge sums of money into its economy throughout the pandemic. But now that a recovery’s officially on the cards, investors are worried the influx of cash will send product prices higher, ultimately forcing the Fed to prematurely raise interest rates to keep this inflation in check.
That matters: stock market valuations are eye-watering in absolute terms, sure, but not when you compare them to record-low interest rates. Higher rates, then, will make safer investments like cash and new government bonds look more attractive, and riskier stocks look more expensive. So just the thought of rising rates has driven some investors to sell off both their priciest stocks and existing bonds last quarter – a trend that’s set to continue throughout the year.
Why should I care?
For markets: Watch the Fed.
The rest of the world’s central banks take their cues from the Fed, which is why it’s so important to keep an eye on what it’s planning to do. Case in point: when the Fed said in March that it wasn’t expecting to tweak interest rate policy despite the country’s improving economic growth outlook, the European Central Bank and Bank of England were quick to reassure investors they’re committed to low rates for the foreseeable future too.
For you personally: How to protect your portfolio from rising rates.
There are three adjustments you can make to your portfolio to set it up for rate hikes, no matter when they happen. First, invest in cyclical and value stocks like industrials and banks, which are set to benefit from an improving economy and rising rates. Second, buy into commodities like copper, since their prices tend to rise alongside inflation. And third, back the US dollar, whose value should rise in line with rates.
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Investors have poured $17 billion into sustainability-focused exchange-traded funds so far this year, in hopes all these green initiatives sprouting up everywhere will lead to a golden goose.
What does this mean?
The US government is on a mission to approve $3 trillion of infrastructure spending, which is expected to include a host of clean energy initiatives. And the impact of that environment-first thinking from the world’s biggest economy is already spreading across the globe: analysts are expecting governments and companies to issue $500 billion worth of “green bonds” – an increasingly popular way of financing green initiatives – this year alone. Italy’s already leading the charge, taking $100 billion worth of orders for the $10 billion worth of green bonds it sold last month.
Why should I care?
For markets: Big oil firms are going with the flow.
A global green agenda stands to hit traditional oil and gas firms hard, but some of the world’s biggest polluters are already falling into line. Just look at French oil giant Total, whose clean energy spending over the last five years represented a quarter of the world’s biggest oil companies’ low-carbon investments put together. This year, meanwhile, rival Shell has revealed plans to transition to cleaner output, as well as more than halve its “traditional energy” production by 2030.
Zooming in: A fund by any other name might perform as well.
There’s research to show that the top environmental, social, and governance-focused (ESG) funds generate higher returns than their less socially responsible peers, but it’s hard to say exactly why. After all, research from Morgan Stanley found that sustainable funds on average held more growth stocks – think fast-growing tech companies – than their non-ESG peers. And given how well those stocks have done over the last few years, it could be that they’re more responsible for the ESG funds’ outperformance than the whole “sustainability” thing is.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.