Macro Insights: New global interest rates regime

HIGHER: The US has not raised interest rates yet, but the global trend has decisively changed. There were over 100 rate hikes globally last year and this year is annualizing at twice that (see chart). This is driven by higher economic growth and inflation, which boosts company profits. But higher interest rates and rising economic slowdown risks also hurts valuations. This is a new global investment regime of lower – but still positive – returns and more volatility, and drives our focus on cheaper sectors and overseas markets.

CONTEXT: Markets have priced-in much already. Five hikes are expected this year in the US, with similar moves in the UK, and now Europe. Less positive is that some cycles will be faster – and therefore more disruptive – than expected, as Central Banks try to catch up. By contrast, many emerging markets (EEM) are ahead of this curve, and hiked early. Brazil’s world-beating rally this year has been driven by higher rates and stronger FX. The global exception is China, the only one cutting rates, and we are positive there.  

ASSETS: Higher interest rates and bond yields hurt valuations. This drives our focus on cheaper sectors, like energy and financials, and markets with lower valuation risks. It also puts a focus on earnings growth, to offset lower valuations. Earnings growth has been strong and expectations are too low. Finally, history shows markets often react with relief when rate hikes start, with the upcycle priced in. We have 36 days until Fed’s first hike!

All data, figures & charts are valid as of 07/02/2022