Historically, rising interest rates have depressed markets.
But when rates are hiked, your clients will still have options, says Phil Davidson, CIO of U.S. Value Equity at American Century Investments. He co-manages the Renaissance U.S. Equity Income Fund.
Equity returns may be dampened, he adds, but you can help people protect their portfolios by focusing on high-quality stocks and bonds.
Davidson notes that some lower-quality companies have outperformed over the past five years. Yet, these businesses will be squeezed when interest rates rise since they’ll face higher expenses and reduced access to capital.
Already, higher quality stocks and bonds have gained popularity since the U.S. Federal Reserve announced tapering plans. The shift is occurring, says Davidson, since people realize that “a rising rate environment [will] make it increasingly difficult for companies…to borrow money…without feeling the impact of increased costs.”
Also, the “widening [of] quality spreads in the debt market [can] flow through to [the] equity performance” of companies that are struggling.
It’s important to start helping clients since markets were weaker in January, says Davidson. He finds people are becoming less optimistic about “the earnings outlook [for 2014] and the macro environment.”
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