In this week’s film, Rashid Hotalwala, Senior Portfolio Manager, explains how momentum in the US economy leaves the Federal Reserve little choice but to raise interest rates in its March meeting.
Our key messages this week are:
DIFFERENT WEEK, SAME STRONG DATA
The US economy continues to lead the charge as payroll numbers and industry surveys supported the outlook for risk assets and cranked up expectations that the Federal Reserve will raise rates in its March meeting.
The US private sector added 298,000 jobs in February - well above market expectations - while the Institute for Supply Management’s survey of activity in manufacturing hit 57.7%, up from 56% in January.
The probability of the US central bank raising rates at its next meeting on 15 March meeting rose to 89%, according to the CME Groups FedWatch tool, reflecting increased confidence in the markets that a rise is imminent.
MARKETS CONSOLIDATE GAINS
Unlike recent weeks, we have seen a pause in the risk rally, especially US equities, mainly because lack of clarity over President Trump’s anticipated fiscal policy plans and rising tensions over North Korea. The US dollar and US short-term bond yields have notched multi-year highs, however, on expectations of a rate rise this week.
In contrast, we expect the Bank of England to keep interest rates on hold, at 0.25%, at its March meeting. The UK Chancellor’s Budget saw the forecast for UK economic growth upgraded to 2% from 1.4% for 2017, but with lower forecasts for subsequent years. Inflation is also predicted set to rise in 2017/18, before easing back in 2019.
DIVERSIFICATION AND THE SEARCH FOR YIELD
The current interest rate environment makes the need for diversification within investment portfolios increasingly important.
For example, within bonds, we have recently added emerging market debt to our portfolios because we feel this asset class offers attractive valuations and additional diversification benefits.
We currently favour equities over bonds in portfolios and this has helped performance in recent periods. For example, a typical balanced portfolio has returned 2.7% year to date (to February 28 2017).
Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
Values in percentage
12 month performance to end of last quarter
Calendar year performance
Since inception 01/01/07
Risk - Standard Deviation
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 2012 2013 2014 2015 2016 2.7 4.8 6.4 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Balanced Strategy Composite
6.4 8.8 5.5 1.3 12.2 6.4 8.8 5.5 1.3 12.2
Client Investment Management & Wealth Structuring, Coutts
Rashid is a Senior Portfolio Manager in Client Investment Management & Wealth Structuring, having joined Coutts in 1995, and is responsible for running private client portfolios.
Rashid moved to the investment team at Coutts in 1999, having previously worked as a wealth manager’s assistant, and has 17 years of experience managing the wealth of high net worth clients. He specialises in running portfolios for resident non-domiciled clients.